Monday, June 12, 2017

Monday, June 12, Morning Global Market Roundup: Asia Stocks Dip, Dollar Buoyant As Fed Comes Into View

By Shinichi Saoshiro
June 12, 2017

Asian stocks edged lower early on Monday following a slide by U.S. technology shares and the dollar rose ahead of this week's U.S. Federal Reserve policy meeting, with markets hoping for more guidance on the central bank's interest rate path.

The Fed holds a two-day meeting ending on Wednesday at which it is widely expected to hike interest rates. The focus is on whether the Fed thinks the U.S. economy is robust enough to withstand further rate increases through 2017.

A rate hike accompanied by a message suggesting that the Fed may raise rates more than expected in 2017 would support the dollar but be negative for equity markets.

"Political events like the UK election and Comey's testimony are over and the focus this weeks shifts to monetary policy," said Junichi Ishikawa, senior forex strategist at IG Securities in Tokyo.

"The equity markets and the dollar have mostly priced in the Fed signalling three rate hikes in 2017. That explains why U.S. equities have held up. But if the Fed hints at more than three hikes, that could trigger a sell-off in equities that many are bracing for."

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS was down 0.1 percent following a mixed day Friday on Wall Street where the Nasdaq .IXIC slid 1.8 percent on tumbling technology shares but the Dow .DJI closed at yet another record high.

MSCI's Asia-Pacific index was still in reach of a two-year high scaled late last week.

Japan's Nikkei .N225 was down 0.5 percent and South Korea's KOSPI slid 0.5 percent. Australian markets were closed for a public holiday.

Equities navigated through last week's potential landmines events relatively unscathed.

Congressional testimony by former FBI Director James Comey caused few ructions, and the fallout of Britain's surprise parliamentary election result, at which the ruling party lost the majority, was mostly contained to the pound.

Sterling was down 0.05 percent at $1.2734 GBP=D4 after sliding 1.7 percent on Friday, when it plumbed a near two-month low of $1.2636.

The dollar was steady at 110.320 yen JPY=. The euro was a shade higher at $1.1205 EUR= following three straight days of losses against the greenback.

The dollar index against a basket of currencies was little changed at 97.255 .DXY following its rise on Friday to a 9-day high of 97.500.

The U.S. currency received support as Treasury yields, which marked seven-month lows early last week at the height of investor jitters towards the UK elections and Comey's testimony, continued their bounce ahead of the Fed's anticipated rate hike.

In commodities, crude oil prices extended gains after rising on Friday when a pipeline leak in major producer Nigeria overshadowed supply worries that have been weighing on the market. [O/R]

U.S. crude CLc1 and Brent LCOc1 were both 0.35 percent higher at $45.99 and $48.32 a barrel, respectively.

Article Link To Reuters:

Oil Prices Driven Up By Futures Bets, But Market Remains Bloated

By Henning Gloystein
June 12, 2017

Oil prices rose early on Monday as futures traders bet the market may have bottomed after a recent steep fall, even as physical markets remain bloated by oversupply, especially from a relentless rise in U.S. drilling.

Brent crude futures were trading at $48.44 per barrel, up 29 cents, or 0.6, from their last close.

U.S. West Texas Intermediate (WTI) crude futures were at $46.09 per barrel, up 26 cents, or 0.6 percent.

Traders said that the price rises came on the back of speculative traders upping their investment into crude futures, by taking on large volumes of long positions, which would profit from a further price rise.

The rise in new long positions comes after Brent and WTI crude futures have fallen by around 10 percent below their opening levels on May 25, when an OPEC-led policy to cut oil output was extended to cover the first quarter of 2018 instead of expiring this June.

While the financial market seems to have some confidence that prices may have bottomed out, the physical market remains bloated, especially due to a rise in U.S. drilling for new oil production.

U.S. energy firms added eight oil rigs in the week to June 9, bringing the total count up to 741, the most since April 2015, energy services firm Baker Hughes Inc BHI.N said on Friday.

This ongoing drive to find new oil has driven up U.S. output by more than 10 percent since mid-2016, to over 9.3 million bpd, a figure the U.S. Energy Information Administration (EIA) says will likely rise above 10 million bpd by next year, challenging top exporter Saudi Arabia.

Soaring U.S. output threatens to undermine an effort led by the Organization of the Petroleum Exporting Countries (OPEC) to cut almost 1.8 million bpd of production until the first quarter of 2018 in order to tighten markets and prop up prices.

Article Link To Reuters:

Russia, Saudis See Oil Inventories Falling After Price Drop

Market to be balanced in first quarter of 2018: Russia’s Novak; Saudi minister sees stockpiles falling faster in coming months.

By Nariman Gizitdinov and Sam Wilkin
June 12, 2017

A deal among oil-producing countries to curb production and balance an oversupplied market will achieve its objective in the first quarter of next year, Russian Energy Minister Alexander Novak said, after prices tumbled on news of a build-up in U.S. inventories.

His Saudi counterpart, Khalid Al-Falih, said at a joint news briefing in Astana, Kazakhstan, that inventories were declining worldwide and reductions would accelerate in the next three to four months. Inventories will settle to their five-year historical average -- OPEC’s target -- before the end of the year, though Saudi Arabia, the group’s biggest producer, may modify its policy if output cuts don’t have the desired effect, he said.

“If we will see over the number of weeks or months reasons to adjust, we will adjust,” Al-Falih told reporters after the briefing. “If by the fourth quarter we will need to do something different, we will seriously consider.”

The Organization of Petroleum Exporting Countries and other crude producers including Russia agreed May 25 to extend the supply deal that they reached last year until the end of the first quarter of 2018. Prices slumped on the news that they wouldn’t cut any deeper, and U.S. crude futures fell 5 percent on June 7 as the nation’s stockpiles unexpectedly grew. International benchmark Brent crude closed at $48.15 a barrel on Friday.

The agreement is working and global crude inventories are falling gradually, Novak said at the same event in Astana. Demand will recover in the first quarter, reducing stockpiles, and Russia is committed to doing everything to balance the market, he said.

Short-term variations in supply won’t affect the long-term trend of declining inventories, Al-Falih said.

U.S. stockpiles of crude and oil products in the week ended June 2 surged by the most since 2008, Energy Information Administration data showed on June 7, after the world’s largest oil consumer boosted imports and trimmed exports. The number of drilling rigs in the U.S. rose by eight to 741 rigs last week, according to Baker Hughes Inc., as shale producers continued to pump more.

Article Link To Bloomberg:

Bernie Sanders Urges Progressives To Seek More Electoral Wins

By Chris Kenning 
June 12, 2017

Buoyed by the British Labour Party election gains this week, Vermont Sen. Bernie Sanders on Saturday urged a summit of progressive activists who propelled his presidential candidacy to ramp up efforts to win elections and help remake a Democratic Party he deemed a failure.

"They won those seats by standing up to the ruling class," he said, referring to the British elections and citing wins by progressive U.S. candidates in several state and local races while writing off losses as evidence liberal progressives could still be competitive even in conservative states.

But Sanders, who lost the Democratic nomination nearly a year ago to Hillary Clinton, showed little interest in a push by "Draft Bernie" activists who want him to start his own "People's Party." Many activists blame establishment Democrats for losing to President Donald Trump by failing to embrace a more populist left-leaning agenda.

Sanders headlined the three-day "People's Summit" in Chicago, attended by celebrity activists including actors Danny Glover and John Cusack, which brought together main progressive groups such as National Nurses United, Democratic Socialists of America and People for Bernie.

Many activists said they hoped to transform the momentum from recent protests such as January's Women's March in Washington into concrete plans to support a growing wave of grassroots candidates to secure electoral power.

"We could have 10,000 people marching, but if we don't have some means of translating that into winning political office and enacting a legislative progressive agenda, at the end of the day, what does it amount to?" said Nick Brana, the former staffer for the Sanders campaign leading the "Draft Bernie" group.

With Trump mired in controversy over incidents such as the firing of former FBI Director James Comey, and Democrats having lost ground in statehouses and in Congress, RoseAnn Demoro, head of the nurses union, said the movement Sanders began was at a "tipping point" of broadening its support.

Leaders with the Democratic Socialists of America said their membership has bloomed from 6,000 before the election to 22,000.

Others warned that progressives don’t have the fundraising firepower they need or that gains were still fledgling.

"We're closer but we're not yet winning," said activist and writer Naomi Klein.

Still, Sanders credited progressives with increasing public acceptance of proposals such as a $15 minimum wage, renegotiating trade policies and offering free college tuition. He got a standing ovation when he said the California Senate recently passed a single-payer health care plan.

Article Link To Reuters:

Chance Of Smooth Brexit Fades After British Election Chaos

By Alastair Macdonald
June 12, 2017

Theresa May's insistence on starting Brexit negotiations next Monday is questioned by Britons who think the prime minister's calamitous election setback means she should now seek to stay in the EU single market.

However, in the year since Britain voted to leave the European Union, the other 27 EU states have hardened their common position and narrowed British options for avoiding a "hard Brexit".

The following scenarios touch on what may happen now voters have dashed May's hopes for a bigger majority to negotiate and left her dependent on pro-Brexit Ulster Protestants and on political rivals reportedly eyeing their moment to oust her.

1. Hard, Smooth Brexit

May, a former supporter of EU membership, filed for divorce in March, meaning Britain would leave the single market and customs union and end EU court oversight, EU budget payments and free migration from the EU to Britain.

After a transition period, May wants an EU-UK free trade pact.

Under Article 50 of the EU treaty, Britain will no longer be a member on March 30, 2019, whether or not the two sides agree a deal to avoid leaving businesses and citizens in a legal limbo.

The EU priority is "damage control" by limiting the economic disruption and saving the Union. That would curb discord and any further breakaways by showing Britain was no better off out.

EU Brexit negotiator Michel Barnier has instructions to seek a deal that preserves the rights of 3 million EU citizens in Britain, recovers money owed by London (possibly $65 billion) and limits any damage to Irish peace from a "hard" EU-UK land border.

If "significant progress" is made on that, EU leaders may then open talks on a transition to a free trade agreement.

In this ideal scenario for Brussels, the outline divorce is set by the end of this year, agreed in full by late 2018 and ratified by lawmakers by March 2019.

There would then be several years of transition to a new treaty, even deeper than a trade pact with Canada, plus close cooperation on security and science.

BUT...Brussels hoped May would win a big majority to help her sell compromises needed for this scenario. Some EU officials now doubt she can remain in power if she accepts too many European demands.

2. Hard Brexit With No Deal

May has said "no deal is better than a bad deal".

BUT...EU leaders think she is bluffing because no deal would spell economic and legal chaos. Yet EU officials have grown increasingly worried that both sides may box themselves in, with little time left.

Before the election, May and her ministers said they would not pay the EU billions on leaving and want trade talks now. Barnier, meanwhile, cannot stray from his mandate without a new, unanimous agreement of the 27.

While neither side of the negotiations wants potentially chaotic limbo, a breakdown could leave both with a messy and unpopular last-minute fix.

3. No Brexit

A year ago, 48 percent of Britons voted to stay in the EU, including most lawmakers from the main parties, most Scots and most in Northern Ireland. Some still cling to the hope of the Brexit process being reversed.

BUT...That hope seems forlorn now that both big British parties now accept Brexit, as does Brussels.

First, Britain would need a new government which wants to stop it. Neither a Conservative party coup against May nor a left-wing coalition led by Jeremy Corbyn's Labour, possibly after a new election, seems likely to deliver that.

Second, it would have to overturn a British legal opinion that the request to leave under Article 50 cannot be revoked.

Third, it would need the EU to agree, most likely by unanimous vote of all 27. And it might mean taking time for another British referendum.

Formally, EU leaders insist they would rather Britain not leave. But the prevailing view in private is that the Union is safer without a big member that has always been lukewarm on the project and is now so divided as to be unreliable.

4. Late Brexit

Political chaos in Britain has prompted calls for more time to negotiate, possibly on different terms from those May has sought. Article 50 allows for an extension to the two-year deadline if the other states unanimously agree.

BUT...EU leaders will hesitate to open a divisive issue among them and want Britain out before European Parliament elections in May 2019. The two-year deadline is designed to weaken the leavers' hand.

5. English Brexit

Scotland's government wants a special deal to stay in the single market or, if not, to secede and stay in or rejoin the EU.

Ireland's EU commissioner has espoused the idea of keeping Northern Ireland in the EU customs union. May's unionist allies in the province also want to avoid a hard border.

BUT...On Scotland, May and the EU doubt a "differentiated deal" on trade and migration can work, while Spain, battling Catalan separatists, may block it. Electoral losses for the Scottish nationalists have also weakened their hand to threaten a new independence vote.

On Ireland, such a scenario appears hugely complicated without raising some form of trade barriers between Northern Ireland and the rest of the UK. That would be anathema to the hardline Protestant DUP.

6. Soft Brexit

This could be the key battleground in the coming months.

Many Brexit opponents suggest that, if it goes ahead, Britain should at least stay in the single market for the sake of jobs and trade.

BUT...While EU leaders do not rule that out, they have set tough conditions similar to those imposed on Norway, which can access EU markets in return for cash contributions, taking EU migrants as well as refugees and observing rules overseen by EU courts.

Such terms are far from what Brexit supporters want and also rob Britain of its big say on EU policy.

And Europeans, as well as May, rule out "cherry picking" deals that give Britain access to certain EU markets, like banking. EU leaders say that would risk undermining the whole single market.

British proponents of soft Brexit say the EU, especially big exporters to Britain, could be persuaded. But the bloc seems for now committed to not breaking ranks. So talks on "soft Brexit" could be a waste of time.

In October, EU summit chair Donald Tusk said: "The only real alternative to a 'hard Brexit' is 'no Brexit'." Pushing soft Brexit over hard is seen increasing the risk of replacing a smooth Brexit with rough.

Article Link To Reuters: