Wednesday, June 14, 2017

Wednesday, June 14, Morning Global Market Roundup: Asia Lags Wall Street's Record Run, Wary Of Fed Plans

By Wayne Cole
June 14, 2017

Asian shares turned mixed on Wednesday while the dollar was left adrift as investors everywhere awaited clarity on the Federal Reserve's future path for U.S. policy after a likely rate rise later in the day.

Futures for European bourses likewise pointed to marginal early gains with the Eurostoxx 50 STXEc1 up 0.1 percent.

Chinese data showed retail sales and industrial output beat forecasts, but a miss in urban investment reinforced views the world's second-largest economy will start to lose momentum as lending costs rise and the property market cools.

The reaction was tepid, with Shanghai stocks easing 0.7 percent .SSEC. Investors dumped stocks partly-owned by Anbang Insurance Group after the company said its chairman was temporarily unable to fulfil his duties.

Moves elsewhere were cautious with MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS up 0.1 percent and Japan's Nikkei .N225 down 0.08 percent.

Wall Street had been in a more confident mood overnight, with major indexes at closing at record peaks. The Dow .DJI rose 0.44 percent, while the S&P 500 .SPX gained 0.45 percent and the Nasdaq .IXIC 0.73 percent.[.N]

The S&P 500 technology sector .SPLRCT rebounded 0.9 percent, following its biggest two-day decline in nearly a year. Big tech names, including Microsoft (MSFT.O) and Facebook (FB.O), led the index higher.

The U.S. central bank is scheduled to release its decision at 1800 GMT on Wednesday with a news conference to follow from Chair Janet Yellen.

Investors fully expect a rate rise largely because Fed officials have told them to, so attention will rather be on the outlook for policy and particularly when the central bank might begin to wind down its massive portfolio of U.S. debt.

"The main focus will be on the Fed's balance sheet policy," said Michelle Girard, chief U.S. economist at RBS.

"While we expect the formal announcement of a change in its balance sheet policy to be made in September, we do not rule out the possibility that strong guidance regarding the time frame for tapering is delivered sooner."

Beware Hawks

While the Fed still has another hike pencilled in for this year, a recent run of soft inflation data has left fund futures <0> implying only a 40 percent chance of a move by December.

The market's five-year outlook for inflation has been falling steadily and currently stands at a seven-month trough of 2.18 percent USIL5YF5Y=R.

It had spiked as high as 2.52 percent last November in the wake of President Donald Trump's surprise election victory.

This leaves the market vulnerable to any hawkish spin from the Fed, which would likely slug Treasury prices while lifting the embattled U.S. dollar.

The currency could do with the help having taken a fresh knock on Tuesday when the head of Canada's central bank put his own hawkish spin on the outlook for rates there.

The U.S. dollar fell as far as C$1.3209 CAD=, its lowest since Feb. 28, having shed two cents in as many days.

It also lost ground to sterling GBP= after UK inflation data surprised on the high side and amid reports Britain's ruling Conservative Party was likely to sign a deal on Wednesday to form a minority government.

Against a basket of currencies, the dollar barely budged at 96.978 .DXY. It was little changed on the Japanese yen at 110.06 JPY= and the euro at $1.1213 EUR=.

In commodity markets, oil slipped after industry data showed a surprise rise in crude stocks and OPEC reported an increase in its production despite its pledge to cut back. [O/R]

Benchmark Brent crude LCOc1 retreated 35 cents to $48.37 a barrel while U.S. light crude CLc1 shed 42 cents to $46.04.

Article Link To Reuters:

Oil Prices Fall On OPEC Output Increase, Rising U.S. Crude Stocks

By Henning Gloystein
June 14, 2017

Oil prices fell around 1 percent on Wednesday after data showed a build in U.S. crude stocks and OPEC reported a rise in its production despite its pledge to cut back on output.

Brent crude futures LCOc1 were at $48.28 per barrel, down 44 cents, or 0.9 percent, from their last close.

U.S. West Texas Intermediate (WTI) crude futures CLc1 were at $45.96 per barrel, down 50 cents, or 1.1 percent.

Crude prices have fall by more than 10 percent since late May, pulled down by an supply glut that persists despite a move led by the Organization of the Petroleum Exporting Countries (OPEC) to cut production by almost 1.8 million barrels per day (bpd) until the end of the first quarter of 2018.

OPEC's own compliance with the cuts has been questioned, and the producer group said in a report this week that its output rose by 336,000 bpd in May to 32.14 million bpd.

ANZ bank said in a note to clients that prices were "under pressure earlier in the day after a report from OPEC showed that its production had increased."

Adding to the supply surplus is rising U.S. production from shale drillers that has pushed U.S. output up by 10 percent over the last year to 9.3 million bpd, not far below levels by top exporter Saudi Arabia. C-OUT-T-EIA

"The outlook for oil hinges on the effectiveness of the OPEC cuts relative to the supply increases from U.S. shale," said William O'Loughlin, analyst at Australia's Rivkin Securities.

Data from the American Petroleum Institute showed on Tuesday that U.S. crude stocks rose by 2.8 million barrels in the week to June 9 to 511.4 million, compared with expectations for a decrease of 2.7 million barrels. [API/S]

With supplies plentiful, strong demand is needed to support the market, but there are signs of a slowdown.

Global energy demand grew by 1 percent in 2016, a rate similar to the previous two years but well below the 10-year average of 1.8 percent, BP (BP.L) said in its benchmark Statistical Review of World Energy on Tuesday.

More specifically for oil, there are signs of a slowdown in China, long the key component of fuel demand growth, as its economy slows. The nation's refiners have produced too much fuel for it to consume, forcing a drop-off in activity.

"Chinese demand is slow ... so we have a build-up of crude in Asia where demand seems to have slowed for now," said Oystein Berentsen, managing director for oil trading company Strong Petroleum.

Article Link To Reuters:

The Lonely Drifting Oil Tanker That Signals OPEC's Struggle

Atlantic oil market oversupplied on Nigeria, Libya production; Oil traders talk of a buyer’s market for light, sweet crude.

By Laura Hurst and Javier Blas
June 14, 2017

If a single ship can capture the current state of the global oil market, it’s the supertanker Saiq, floating idly about 850 kilometers (530 miles) south of the Canary Islands.

Until a few days ago, the 330-meter-long tanker, chartered by Royal Dutch Shell Plc, was steaming at 13 knots toward the Chinese port of Tianjin after loading a 2-million-barrel cargo of North Sea oil at the Hound Point terminal near Edinburgh. Then, it suddenly stopped in the middle of the Atlantic Ocean, according to ship-tracking data compiled by Bloomberg.

Its problem: China isn’t buying much crude right now, leaving the tanker searching for a customer. While the vessel was floating near Africa last week, Shell offered to sell the cargo in a ship-to-ship transfer all the way back in Scotland. There weren’t any takers.

Across the world, the plight of the Saiq, now idling off the coast of Mauritania, reflects a broader trend in the physical oil market. After six months of oil-production cuts from the Organization of Petroleum Exporting Countries and 11 non-OPEC nations led by Russia, crude supply is surprisingly still plentiful, according to traders.

"It’s a buyer’s market," said Olivier Jakob, managing director of Swiss-based consultant Petromatrix GmbH, echoing a widely held view in the physical market.

On paper, global supply and demand balances from the likes of the International Energy Agency say the market should be reducing stockpiles. Oil prices, however, suggest that any inventory reduction remains minimal. The headline price for Brent crude, the global benchmark, is below $50 a barrel, indicating buyers are on the sidelines.

Time spreads, the price difference between contracts for different months, have widened considerably in June, with key measures at levels last seen in November, when OPEC announced its output cuts. Signs have emerged that traders are resorting to turning tankers into floating storage due to a lack of buyers.

Atlantic Glut

The oversupply is particularly acute in the so-called Atlantic basin, where high quality light, sweet crude is abundant due to a combination of factors. They include the return of some Nigerian production, stronger output from Libya, robust North Sea supplies and record-high U.S. oil exports.

"Recovering output from Nigeria and Libya — which has unexpectedly sustained so far — is worsening the imbalance of light crudes in the market and effectively halving the OPEC cuts," said Amrita Sen, chief oil analyst at consultant Energy Aspects Ltd. in London. "If OPEC does nothing to compensate for their recovery, light crude prices will remain low," she added.

Nigerian production is recovering after Shell last week lifted restrictions on exports of Forcados crude oil, a key grade, following a disruption that lasted 472 days. The move may add as much as 250,000 barrels a day of high quality, light and sweet crude into the Atlantic. While Shell subsequently placed limits on shipments of Nigeria’s Bonny Light crude, the return of Forcados occurs just as regional refiners are awash with similar grades from the U.S., North Sea and Africa.

In Libya, output is near its highest in three years following last week’s restart of the Sharara oil field, the nation’s largest, adding an extra 250,000 barrels a day.

The glut in the Atlantic has been exacerbated by lackluster buying from China, in part because the country’s independent refiners, known as “teapots,” embarked on a buying spree earlier this year. Still, China’s presence in the market could increase. The supertanker Saiq is now signaling another Chinese port as its final destination, though throughout the day Tuesday it appeared to be drifting off the African coast. A Shell spokeswoman declined to comment on cargo movements.

Seasonal Demand

The weakness in the Atlantic basin is visible in the widening price difference between Brent crude for delivery in December 2017 and December 2018 -- a popular trade often seen as a signal of whether the market is drawing down stocks. The more negative the spread, the larger the oversupply. The spread fell to a six-month intraday low of minus $1.49 a barrel on June 9, down from plus $1 a barrel two weeks ago. It is now at about minus $1 a barrel.

Other signals point to an oversupply, despite the fact the Atlantic market is entering its strongest season as refiners ramp up crude processing to meet summer gasoline demand in the U.S. For example, in the North Sea oil traders have turned seven laden tankers into floating storage facilities while they wait for customers. Sellers in the region have taken to offering crude for ship-to-ship transfer, typically seen as a sign of a bloated market.

In the world of contracts for difference, which allow traders to insure price exposure for their North Sea crude shipments week-by-week, the nearest contract plunged to minus $1.14 a barrel on Tuesday, down from minus 94 cents at the end of May. In the physical market, prices remained at discounts to the Dated Brent price marker as offers for cargoes outstripped bids.

"This should be the tightest season of the year,” said Petromatrix’s Jakob. “But if you look at physical oil differentials and Brent spreads, it’s signaling a crude overhang in the Atlantic."

Article Link To Bloomberg:

Here's Why Oil Prices Could Drop To $30 A Barrel Again

-- Fereidun Fesharaki, chairman of consulting group FGE, said crude oil prices could drop back to $30 a barrel if OPEC doesn't make any further cuts to production
-- Fesharaki said the Saudi-led attempt to isolate Qatar wasn't likely to have a long-term or substantial impact on global oil prices, except in the unlikely event of a military confrontation

June 14, 2017

A leading global energy market academic warned that crude prices could sink back to $30 a barrel if OPEC fails to make additional cuts to production.

"The problem is that there is too much oil on the market. There is too much oil from the U.S., too much oil from Libya, too much oil from Nigeria," said Fereidun Fesharaki, founder and chairman of consulting group FGE, which focuses on oil and gas markets east of the Suez and in Europe and the U.S.

"While the demand is robust, there is a serious likelihood that prices will sink next year to $30-$35 a barrel and will stay there for a while," he told Squawk Box on the sidelines of the Credit Suisse Australia Energy Conference in Sydney on Wednesday.

Fesharaki, who has studied Asia Pacific and Middle East energy markets since the early 1980s, said he believes the so-called red line for Saudi Arabia is 9 million barrels of oil per day, and any failure to cut below that level would cause a price pullback.

"You have to cut another 700,000 barrels per day right away or prices will sink," he said. "Even if you do this, next year you'll still have to cut more, so it comes down to how far the Saudis are prepared to cut."

Late last month, OPEC said it would extend an 1.8 million-barrel-a-day cut to oil output by nine months, though March 2018, after the November deal failed to fully clear a global oversupply in oil, which has been keeping prices relatively low. Some non-OPEC producers have also signed on to the deal.

Fesharaki said his assumption wasn't just based on oversupply.

Taking a contrarian view, he also believes that a slump in crude prices could lead to a slump in demand.

"A drop in the price of oil is like an earthquake or a tsunami," he added.

"If you have a small drop in the price of oil, then actually it's good for demand and good for economic growth, but last time the price of oil fell, the stock markets fell with it. I think there is a scary environment now that a substantial drop in the price of oil would actually create a global recession."

Other analysts have previously noted that a sharp drop in oil prices can weigh heavily on the economies of oil producers, which then can see declining consumer confidence and spending.

Qatar In Crisis

Fesharaki believes the diplomatic crisis engulfing Qatar is unlikely to have a long term or substantial impact on global oil prices.

"It's not threatening any production, so the markets have yawned," he said.

Several Saudi-led Arab states abruptly cut off ties to tiny Qatar earlier this month.

Saudi Arabia has issued demands of Qatar, including ending relations with Iran, breaking all ties to the Muslim Brotherhood and expelling all members of Hamas, according to an Al Jazeera report. It also demanded Qatar shut down broadcaster Al Jazeera, which came under cyber attack last week.

The catalyst for the rift was an alleged statement by Qatar's emir that criticized Saudi Arabia and President Donald Trump, who recently visited Saudi Arabia in his first foreign trip, agreeing to new military contracts and a broader economic relationship.

Doha denies allegations that it has supported terrorism.

Turkey, a strong ally of Qatar, will send its foreign minister to Doha on Wednesday and possibly to Saudi Arabia, as it looks to end the feud.

"I don't see this as a factor impacting the oil market unless you get into a military confrontation – which is very unlikely," he said. "With Turkey now taking troops to Qatar and the Iranians supplying food and water, I think the stakes for the Saudis have become much bigger. If they escalate this further, then it can get very ugly."

Article Link To CNBC:

How Trump Is Like Obama

There’s more continuity than difference between ‘nation-building at home’ and ‘America First.’

By Josef Joffe
The Wall Street Journal
June 14, 2017

Uncle Sam is getting pushed around by the rest of the world, and we aren’t going to take it anymore.
That is the gist of President Trump’s “America First” doctrine. But let’s cut No. 45 some slack. He is not the first to chop away at the made-in-the-USA global order designed by Harry S. Truman 70 years ago. Pride of place must go to No. 44, Barack Obama.

What, that exemplar of internationalist virtue? True, President Obama did not trumpet “America First.” His standard shibboleth was “It’s time for a little nation-building at home,” echoing George McGovern’s “Come home, America!” from 1972. Let’s lay down the burden and mend crumbling bridges and failing schools, Mr. Obama suggested. Cut to Mr. Trump, who wants to invest $1 trillion in the domestic infrastructure.

Come home or To hell with you—either way, the message reads: The world’s housekeeper will now look out for No. 1. So Mr. Trump keeps bullying the allies on defense spending, demanding zillions in back pay for the security the U.S. has always delivered at a discount. Now listen to Mr. Obama. In a 2016 interview with the Atlantic, he rumbled: “free riders aggravate me.”

Mr. Trump hasn’t brought the boys home, but Mr. Obama did. He drew down the European force to about 50,000 from 75,000. During the 1980s, it numbered 350,000. That was supposed to be accompanied by the fabled “pivot” to Asia, but it didn’t materialize. Instead Mr. Obama presided over a global retraction, most grievously in Iraq. Then, refusing to enforce his “red line” in Syria, Mr. Obama invited Russia in and effectively welcomed Iran, too. Turning away from old allies, he chased the will-o’-the-wisp of Iranian friendship. In Mr. Obama’s view, paraphrased by the Atlantic’s Jeffrey Goldberg, “the Middle East is no longer terribly important to American interests.” Meanwhile, Tehran has expanded to the Mediterranean.

The Obama agenda was self-containment, a first in the history of great powers. So who would mind the global store, as the U.S. had done since 1945? Under Mr. Obama, “Yes, we can” segued into “Others will.” Moscow, Tehran and Beijing did, but not as retainers of Aloof America. Rising powers have never seen a vacuum they did not like.

Set aside Mr. Trump’s in-your-face tweets and savor the kinship between Donald the Crude and Barack the Cool. Each in his own way—softly or brutally—has signaled: America, previously the “indispensable nation,” is vacating its penthouse at the top of the global hierarchy. No great power has ever done so voluntarily; all America’s predecessors were sent packing by more-muscular competitors.

Yes, but doesn’t Mr. Trump want to “make America great again”? First, this is a mendacious slogan. By any measure, America was not a limping giant on Jan. 20 but the greatest power on earth, given its economic primacy, military clout, diplomatic centrality and, not to forget, cultural sway. The world dresses, watches, listens and dances American. Some has-been!

Second, what makes a nation “great”? Mr. Trump thinks it is unbridled national egotism, flanked by the extended middle finger, as when he withdrew from the nonbinding Paris climate accord. Promptly, China began to posture as the guardian of global goodness. Another great victory was pushing aside the leader of tiny Montenegro at the NATO summit’s photo-op last month.

The short take on Trumpist diplomacy: A schoolyard bully is never elected class president. The other kids may fear him, but they won’t follow him. Leadership means taking care of others while going to the top. It comes from authority grounded in consent, not humiliation of the weak.

Still, America’s slide into abdication began in 2009, not in 2017. What made America great after World War II? Sheer clout, at first. So why did the Pax Americana endure while Europe and Japan rose from the ruins and China grew into the world’s second-biggest economy? Because of the genius of pre-Obama, pre-Trump diplomacy: Achieve your own ends not by going mano-a-mano, but by serving the interests of others in the process, like safeguarding security and the liberal trading order.

“Too expensive!” trumpets No. 45. Let’s consult No. 33, President Truman: “Which is better for the country,” he asked with a view to Europe, “to spend 20 or 30 billion dollars to keep the peace, or to do as we did in 1920 and then have to spend 100 billion dollars for four years to fight a war?”

In World War II, U.S. defense outlays peaked at 41% of gross domestic product. Today, the cost of empire has come down to 3.6%—a steal. So the Europeans spend only 1.5% on average? Global powers always pay more for defense; that’s part of what makes them great. The U.S. is not doing the European Union a favor by adding its own weight to an Atlantic order that doubles as the world’s largest trade and investment relationship. The insurance premium is worth it, especially given Vladimir Putin’s blatant strategic ambitions.

Do good for yourself by doing good for others—that has been the secret of America’s realpolitik and exalted position. While Mr. Obama wielded hammer and chisel against the nation’s perch, Mr. Trump is waving a chain saw. As friends retract, rivals rejoice: What a windfall! But take solace from Bismarck, who supposedly quipped: “God protects children, drunkards and the United States.

Article Link To The WSJ:

The Old Are Eating The Young

Around the world, a generational divide is worsening.

By Satyajit Das
The Bloomberg View
June 14, 2017

Edmund Burke saw society as a partnership between those who are living, those who are dead, and those who are yet to be born. A failure to understand this relationship underlies a disturbing global tendency in recent decades, in which the appropriation of future wealth and resources for current consumption is increasingly disadvantaging future generations. Without a commitment to addressing this inequity, social tensions in many societies will rise sharply.

Central to the issue is that the rapid rise in living standards and prosperity of the past 50 years has been largely based on rising debt levels, ignoring the costs of environmental damage and misallocation of scarce resources.

A significant proportion of recent economic growth has relied on borrowed money -- today standing at a dizzying 325 percent of global gross domestic product. Debt allows society to accelerate consumption, as borrowings are used to purchase something today against the promise of future repayment. Unfunded entitlements to social services, health care and pensions increase those liabilities. The bill for these commitments will soon become unsustainable, as demographic changes make it more difficult to meet.

Degradation of the environment results in future costs, too: either rehabilitation expenses or irreversible changes that affect living standards or quality of life. Profligate use of mispriced non-renewable natural resources denies these commodities to future generations or increases their cost.

The prevailing approach to dealing with these problems exacerbates generational tensions. The central strategy is “kicking the can down the road” or “extend and pretend,” avoiding crucial decisions that would reduce current living standards, eschewing necessary sacrifices, and deferring problems with associated costs into the future.

Rather than reducing high borrowing levels, policy makers use financial engineering, such as quantitative easing and ultra-low or negative interest rates, to maintain them, hoping that a return to growth and just the right amount of inflation will lead to a recovery and allow the debt to be reduced. Rather than acknowledging that the planet simply can’t support more than 10 billion people all aspiring to American or European lifestyles, they have made only limited efforts to reduce resource intensity. Even modest attempts to deal with environmental damage are resisted, as evidenced by the recent fracas over the Paris climate agreement. Short-term gains are pursued at the expense of costs which aren’t evident immediately but will emerge later.

This growing burden on future generations can be measured. Rising dependency ratios -- or the number of retirees per employed worker -- provide one useful metric. In 1970, in the U.S., there were 5.3 workers for every retired person. By 2010 this had fallen to 4.5, and it’s expected to decline to 2.6 by 2050. In Germany, the number of workers per retiree will decrease to 1.6 in 2050, down from 4.1 in 1970. In Japan, the oldest society to have ever existed, the ratio will decrease to 1.2 in 2050, from 8.5 in 1970. Even as spending commitments grow, in other words, there will be fewer and fewer productive adults around to fund them.

Budgetary analysis presents a similarly dire outlook. In a 2010 research paper, entitled “Ask Not Whether Governments Will Default, But How,” Arnaud Mares of Morgan Stanley analyzed national solvency, or the difference between actual and potential government revenue, on one hand, and existing debt levels and future commitments on the other. The study found that by this measure the net worth of the U.S. was negative 800 percent of its GDP; that is, its future tax revenue was less than committed obligations by an amount equivalent to eight times the value of all goods and services America produces in a year. The net worth of European countries ranged from about negative 250 percent (Italy) to negative 1,800 percent (Greece). For Germany, France and the U.K., the approximate figures were negative 500 percent, negative 600 percent and negative 1,000 percent of GDP. In effect, these states have mortgaged themselves beyond their capacity to easily repay.

A final revealing measure is the concept of lifetime net tax benefit, which measures the benefits received over a person’s life by calculating the difference between all taxes paid and all the government transfers that he or she has received and will receive. A 2010 study from the International Monetary Fund found that in the U.S. the lifetime tax burden was positive (tax paid was less than benefits received) for all age cohorts above 18 years, with the largest benefit accruing to those over age 50. But the figure for future generations is negative (benefits received will be less than taxes paid), meaning they’ll have to meet the obligations of their elders.

Such measurements probably understate the shortfall, as they fail to account for the cost of environmental damage or higher commodity prices resulting from resource shortages. Future generations will bear the ultimate cost of present decisions or inaction. As in Francisco Goya’s famous painting, “Saturn Devouring His Son,” today, the old are eating their children.

Article Link To The Bloomberg View:

The Global Economy Is Rebounding, But There's One Big Problem

Emerging markets, led by China, have propelled world growth; Lack of EM safe-haven assets is a problem, says Stephen Jen.

By Chris Anstey and Enda Curran
June 14, 2017

There’s a dark cloud building behind the world’s best period of synchronous growth among developed and emerging economies this decade -- one that in time could rain down volatility in global markets.

The problem, identified by strategist and hedge fund manager Stephen Jen, is a deepening imbalance in the lack of new safe-haven assets as the world’s output expands.

China and other developing nations are accumulating wealth, but failing to create sophisticated local markets that feature their own risk-free instruments. That’s left a dangerous reliance on U.S. Treasuries, according to Jen’s argument, perpetuating a bond bubble and pushing investors into riskier assets.

It’s a tweaked version of the “savings glut” argument that then-Federal Reserve Governor Ben S. Bernanke put forward in 2005 to explain why American borrowing costs were stuck at low levels even as the U.S. hiked interest rates. These days, current account imbalances among the U.S., China and Japan have come down, and Asia’s biggest economies are carrying higher debt loads, undermining the idea that there’s too much savings.

Instead, the problem is that emerging markets haven’t yet been able to develop assets that investors are willing to hold as stores of value and collateral when times get tough. Doing that requires strong levels of confidence in the rule of law, equitable regulation and belief that money can be withdrawn by the investor whenever needed.

“The local capital markets in EM still lack the sophistication to match the real sectors in these economies,” Jen and colleague Nicolo Bandera wrote in a note last week. The continued growth of emerging markets while their financial systems lag behind produces “a situation whereby the genuine safe-haven assets such as the U.S. Treasuries, German bunds, and the British gilts become increasingly rare and in short supply,” they wrote.

Fed and other central bank purchases of their own government bonds have even further limited the supply of such assets, Jen and Bandera highlighted. The Fed is widely forecast to raise borrowing costs for the second time in 2017 this week, with attention zooming in on plans to dial back its $4.5 trillion balance sheet.

China, as the world’s second-largest economy, offers the best chance to develop an alternative to the U.S. Treasuries market, though its capital controls have left foreign investors wary to take full advantage of new avenues to invest in its government bonds.

A history of punishing foreign countries that take actions the Communist leadership dislikes -- such as when South Korea moved to allow a U.S. missile-defense system -- could also play into foreign and domestic investor reluctance to embrace Chinese assets as a haven.

“China should – no doubt – develop a more liquid and open government bond market,” said Alicia Garcia Herrero, chief Asia-Pacific economist at Natixis SA in Hong Kong. Doing so would offer an alternative to Treasuries and help internationalize the yuan, she said.

“Absent of a massively large and liquid sovereign bond market which can act as free-risk collateral and benchmark for other instruments, no currency can ever become an international currency,” Garcia Herrero said. “China seems to have understood the lesson but, still, too much effort is put in developing the corporate bond market. This is like starting a house from the roof.”

Demand dynamics have also contributed to the shortage of haven assets.

Scarred by past purchases of developed-nation bonds that turned out to be less than safe in the global crisis, and investing in a world with a more subdued growth path since, investors have piled into assets seen as low risk, says Cui Li, head of macro research at CCB International Holdings Ltd. in Hong Kong.

“Can China help and should China open up? Sure,” Li says. “It helps to create financial stability in a world where U.S. Treasury bonds dominate,” by creating alternative vehicles for reserve assets, she said.

As Chinese markets join global indexes, their assets will increasingly gain global acceptance, argues Luke Spajic, head of portfolio management for emerging Asia at Pacific Investment Management Co. in Singapore. It will just take time. In a sign of support for China’s efforts, the European Central Bank announced on Tuesday it shifted a small portion of its dollar reserves into yuan.

“These are some of the biggest debt markets in the world -- however, this market is in its infancy,” Spajic said of China’s corporate credit and government debt. “It may take years to reach developed-market standards, so investors must simply adapt to the terrain.”

In the meantime, Jen and Bandera worry about the unusual configuration of asset prices and their reaction -- or lack thereof -- to news and shocks. “The aggressive monetary policies have pushed the world into a cul-de-sac, the exit from which may not be orderly, we fear.”

Article Link To Bloomberg:

U.S. Weighs Restricting Chinese Investment In Artificial Intelligence

By Phil Stewart
June 14, 2017

The United States appears poised to heighten scrutiny of Chinese investment in Silicon Valley to better shield sensitive technologies seen as vital to U.S. national security, current and former U.S. officials tell Reuters.

Of particular concern is China's interest in fields such as artificial intelligence and machine learning, which have increasingly attracted Chinese capital in recent years. The worry is that cutting-edge technologies developed in the United States could be used by China to bolster its military capabilities and perhaps even push it ahead in strategic industries.

The U.S. government is now looking to strengthen the role of the Committee on Foreign Investment in the United States (CFIUS), the inter-agency committee that reviews foreign acquisitions of U.S. companies on national security grounds.

An unreleased Pentagon report, viewed by Reuters, warns that China is skirting U.S. oversight and gaining access to sensitive technology through transactions that currently don't trigger CFIUS review. Such deals would include joint ventures, minority stakes and early-stage investments in start-ups.

"We're examining CFIUS to look at the long-term health and security of the U.S. economy, given China's predatory practices" in technology, said a Trump administration official, who was not authorized to speak publicly.

Defense Secretary Jim Mattis weighed into the debate on Tuesday, calling CFIUS "outdated" and telling a Senate hearing: "It needs to be updated to deal with today's situation."

CFIUS is headed by the Treasury Department and includes nine permanent members including representatives from the departments of Defense, Justice, Homeland Security, Commerce, State and Energy. The CFIUS panel is so secretive it normally does not comment after it makes a decision on a deal.

Under former President Barack Obama, CFIUS stopped a series of attempted Chinese acquisitions of high-end chip makers.

Senator John Cornyn, the No. 2 Republican in the Senate, is now drafting legislation that would give CFIUS far more power to block some technology investments, a Cornyn aide said.

"Artificial intelligence is one of many leading-edge technologies that China seeks and that has potential military applications," said the Cornyn aide, who declined to be identified.

"These technologies are so new that our export control system has not yet figured out how to cover them, which is part of the reason they are slipping through the gaps in the existing safeguards," the aide said.

The legislation would require CFIUS to heighten scrutiny of buyers hailing from nations identified as potential threats to national security. CFIUS would maintain the list, the aide said, without specifying who would create it.

Cornyn's legislation would not single out specific technologies that would be subject to CFIUS scrutiny. But it would provide a mechanism for the Pentagon to lead that identification effort, with input from the U.S. technology sector, the Commerce Department, and the Energy Department, the aide said.

James Lewis, an expert on military technology at the Center for Security and International Studies, said the U.S. government is playing catch-up.

"The Chinese have found a way around our protections, our safeguards, on technology transfer in foreign investment. And they're using it to pull ahead of us, both economically and militarily," Lewis said.

"I think that's a big deal."

But some industry experts warn that stronger U.S. regulations may not succeed in halting technology transfer and might trigger retaliation by China, with economic repercussions for the United States.

China made the United States the top destination for its foreign direct investment in 2016, with $45.6 billion in completed acquisitions and greenfield investments, according to the Rhodium Group, a research firm. Investment from January to May 2017 totaled $22 billion, which represented a 100 percent increase against the same period last year, it said.

"There will be a significant pushback from the technology industry" if legislation is overly aggressive, Rhodium Group economist Thilo Hanemann said.

A.I.'s Role In Drone Warfare

Concerns about Chinese inroads into advanced technology come as the U.S. military looks to incorporate elements of artificial intelligence and machine learning into its drone program.

Project Maven, as the effort is known, aims to provide some relief to military analysts who are part of the war against Islamic State.

These analysts currently spend long hours staring at big screens reviewing video feeds from drones as part of the hunt for insurgents in places like Iraq and Afghanistan.

The Pentagon is trying to develop algorithms that would sort through the material and alert analysts to important finds, according to Air Force Lieutenant General John N.T. "Jack" Shanahan, director for defense intelligence for warfighting support.

"A lot of times these things are flying around(and)... there's nothing in the scene that's of interest," he told Reuters.

Shanahan said his team is currently trying to teach the system to recognize objects such as trucks and buildings, identify people and, eventually, detect changes in patterns of daily life that could signal significant developments.

"We'll start small, show some wins," he said.

A Pentagon official said the U.S. government is requesting to spend around $30 million on the effort in 2018.

Similar image recognition technology is being developed commercially by firms in Silicon Valley, which could be adapted by adversaries for military reasons.

Shanahan said he' not surprised that Chinese firms are making investments there.

"They know what they're targeting," he said.

Research firm CB Insights says it has tracked 29 investors from mainland China investing in U.S. artificial intelligence companies since the start of 2012.

The risks extend beyond technology transfer.

"When the Chinese make an investment in an early stage company developing advanced technology, there is an opportunity cost to the U.S. since that company is potentially off-limits for purposes of working with (the Department of Defense)," the report said.

Chinese Investment

China has made no secret of its ambition to become a major player in artificial intelligence, including through foreign acquisitions.

Chinese search engine giant Baidu Inc (BIDU.O) launched an AI lab in March with China's state planner, the National Development and Reform Commission. In just one recent example, Baidu Inc agreed in April to acquire U.S. computer vision firm xPerception, which makes vision perception software and hardware with applications in robotics and virtual reality.

"China is investing massively in this space," said Peter Singer, an expert on robotic warfare at the New America Foundation.

The draft Pentagon report cautioned that one of the factors hindering U.S. government regulation is that many Chinese investments fall short of outright acquisitions that can trigger a CFIUS review. Export controls were not designed to govern early-stage technology.

It recommended that the Pentagon develop a critical technologies list and restrict Chinese investments on that list. It also proposed enhancing counterintelligence efforts.

The report also signaled the need for measures that fall beyond the scope of the U.S. military. Those include altering immigration policy to allow Chinese graduate students the ability to stay in the United States after completing their studies, instead of taking their know-how back to China.

Venky Ganesan, managing director at Menlo Futures, concurs about the need to keep the best and brightest in the United States.

"The single biggest thing we can do is staple a green card to their diploma so that they stay here and build the technologies here – not go back to their countries and compete against us," Ganesan said.

Article Link To Reuters:

Uber’s Growing Pains

The ride-sharing app won’t survive if lawyers and HR run the show.

By Review & Outlook
The Wall Street Journal
June 14, 2017

Ride-hailing app Uber Technologies’ growth curve has been as meteoric as its learning curve has been steep. But its leadership turmoil shows the perils of moving from Silicon Valley darling to durable success, especially if it wants to tap public markets for capital anywhere close to its $68 billion valuation.

Uber said Tuesday that CEO Travis Kalanick will take an indefinite leave from the company he built, a day after chief business officer Emil Michael stepped down. The moves followed a unanimous vote by Uber’s board—which consists of private investors—to adopt reforms to its “workplace culture.” The San Francisco-based startup enlisted former U.S. Attorney General Eric Holder’s law firm Covington & Burling after several women complained that Uber executives ignored sexual-harassment allegations.

Workplace culture often flows from the top, and the internal analysis seeks to correct lapses in executive judgment. In 2014 Mr. Michael floated a plan to dig up details about the private lives of journalists critical of the company. Earlier this year Mr. Kalanick was caught on camera berating a driver.

Yet Uber would never have achieved what it has if not for Mr. Kalanick’s hard-charging attitude. The company has had to break through regulatory barriers backed by the taxi lobby in city after city, and it didn’t do that by bowing at the first sign of resistance. Uber’s innovation has greatly improved the lives of millions of urban travelers, and that breakthrough has in turn invited competitors like Lyft, Via and Gett. There’s no guarantee that Uber will emerge as the Facebook of this pack.

But Uber’s hardball tactics also present business risks. Last year the California DMV pulled the registration on Uber’s self-driving cars because the company didn’t obtain a $150 permit to test its vehicles. Twenty other car manufacturers had obtained permits, but Uber didn’t see the need. It finally conceded to apply for a permit in March. The Justice Department is also investigating Uber’s use of “greyball” software to evade regulators in jurisdictions where it wasn’t authorized to operate.

Uber is the dominant ride-hailing app in most U.S. cities because private investors bankrolled its rapid expansion with recruitment bonuses for drivers. A high concentration of drivers in cities reduces rider wait times while heavy customer traffic deters drivers—in effect free agents—from defecting to other apps.

Millennials are fickle customers, and a drop in ridership could divert drivers to competing apps. This would make it harder for Uber to raise capital to sustain its huge losses ($2.8 billion last year) as it expands. Investors who may have tolerated Uber’s earlier blunders because of its growth potential will draw a line when management failures impair the company’s performance and profitability.

Consider the lawsuit by Google’s self-driving startup Waymo that accuses former employee Anthony Levandowski of lifting trade secrets before joining Uber. Last month federal Judge William Alsup referred the case to prosecutors after declaring that the evidence that Mr. Levandowski pilfered Waymo’s technology was highly incriminatory. Uber has denied colluding with Mr. Levandowski. But even if Uber isn’t found complicit in the alleged piracy, the judge could bar it from using any cribbed code or technology. This would be a major setback in Silicon Valley’s autonomous car race.

All of this explains why investors are shaking up Uber’s management, but that also carries risks. Sheryl Sandberg’s collaboration with Mark Zuckerberg worked for Facebook, but John Scully clashed with Steve Jobs when he arrived at Apple from Pepsi. Jobs left Apple but returned to revive it with a new burst of innovation. One certainty: Uber won’t survive the ride-sharing shakeout if the lawyers at Covington & Burling are in charge.

One question for capitalism is whether Uber’s shakeup would have occurred sooner if it had already braved public equity markets. Two decades ago startups went public much earlier in their business cycle. But Sarbanes-Oxley and other regulatory demands have made going public far more costly, and even successful tech startups tend to delay listing shares on exchanges. Public markets are sensitive to losses and bad publicity, so they can be as useful for disciplining managers as they are for rewarding investors.

The only story the business press likes better than a glorious startup is an inglorious failure, so Mr. Kalanick is now getting a rough ride. But he’s built an innovative business that fulfills a public need, and Uber’s investors had better hope his replacement is as good a manager as Mr. Kalanick has been an entrepreneur.

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Uber Director David Bonderman Resigns From Board Following Comment About Women

By Heather Somerville
June 14, 2017

Uber Technologies Inc director David Bonderman said on Tuesday that he has resigned from the company's board following a remark he made during an Uber staff meeting that was widely seen as offensive to women.

Bonderman's ill-timed remark came during an all-staff meeting Tuesday to discuss of how the ride-services company plans to transform itself following a probe into sexual harassment at the company.

Bonderman said in a statement sent to Reuters that he did not want his comments to create distraction for Uber, which is working to rid its culture of sexual harassment and discrimination.

His resignation from the board is effective Wednesday morning.

During Tuesday's meeting, Uber board member Arianna Huffington spoke to employees about the importance of adding more women to the board of directors.

"There's a lot of data that shows when there's one woman on the board, it's much more likely that there will be a second woman on the board," Huffington said.

In response, Bonderman said: "Actually, what it shows is that it's much more likely to be more talking."

The comment was disclosed through a recording of the meeting that was published by Yahoo. An Uber spokesman verified the authenticity and accuracy of the recording.

Bonderman, who is a founder of private equity firm TPG Capital, an Uber investor, shortly after wrote an email to Uber staff to apologize.

In his resignation statement that followed on Tuesday evening, Bonderman reiterated his regret, calling his remarks "careless, inappropriate, and inexcusable" and "the opposite of what I intended."

"I take full responsibility for that," he said. "I need to hold myself to the same standards that we're asking Uber to adopt."

Bonderman and other board members had joined Tuesday's staff meeting to lay out recommendations from an investigation into sexual harassment, diversity, inclusion and other employee concerns led by former U.S. Attorney General Eric Holder.

Holder's law firm was retained by Uber in February after former Uber engineer Susan Fowler wrote a public account of her time at the company, which she said was marred by sexual harassment and an ineffective response by management.

The recommendations, which were unanimously adopted by the board on Sunday, call for reducing Chief Executive Travis Kalanick's sweeping authority at the firm and instituting more controls over spending, human resources and the behavior of managers.

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Death Of The Human Investor: Just 10% Of Trading Is Regular Stock Picking

-- "Fundamental discretionary traders" account for only about 10 percent of trading volume in stocks today, JPMorgan estimates.
-- "The majority of equity investors today don't buy or sell stocks based on stock specific fundamentals," said JPMorgan's Marko Kolanovic.
-- JPMorgan believes the recent sell-off in technology stocks may have been related to quantitative and computer trading and not traditional fundamental investors.

June 14, 2017

Quantitative investing based on computer formulas and trading by machines directly are leaving the traditional stock picker in the dust and now dominating the equity markets, according to a new report from JPMorgan.

"While fundamental narratives explaining the price action abound, the majority of equity investors today don't buy or sell stocks based on stock specific fundamentals," Marko Kolanovic, global head of quantitative and derivatives research at JPMorgan, said in a Tuesday note to clients.

Kolanovic estimates "fundamental discretionary traders" account for only about 10 percent of trading volume in stocks. Passive and quantitative investing accounts for about 60 percent, more than double the share a decade ago, he said.

In fact, Kolanovic's analysis attributes the sudden drop in big technology stocks between Friday and Monday to changing strategies by the quants, or the traders using computer algorithms.

In the weeks heading into May 17, Kolanovic said funds bought bonds and bond proxies, sending low volatility stocks and large growth stocks higher. Value, high beta and smaller stocks began falling in a rotation labeled "an unwind of the 'Trump reflation' trade," Kolanovic said.

"Upward pressure on Low Vol and Growth, and downward pressure on Value and High Vol peaked in the first days of June (monthly rebalances), and then quickly snapped back, pulling down FANG stocks" — Facebook,, Netflix and Google parent Alphabet, the report said.

Along with Apple, the big tech-related names fell more than 3 percent each last Friday and dropped again Monday, sending the Nasdaq composite lower in its worst two-day decline since December.

However, "the contribution coming from quant rebalances to this snapback is now likely over," Kolanovic said, noting that S&P derivatives have supported market gains at the beginning of this week.

"$1.3T of S&P 500 options expire on Friday, and this will change dealers' positioning," he said. "This can result in a modest increase of market volatility starting on Friday and into next week."

Tech recovered Tuesday, helping U.S. stocks close higher with the Dow Jones industrial average at a record.

Derivatives, quant fund flows, central bank policy and political developments have contributed to low market volatility, Kolanovic said. Moreover, he said, "big data strategies are increasingly challenging traditional fundamental investing and will be a catalyst for changes in the years to come."

Figures from market structure research firm Tabb Group point to similar gains in machine-driven trade volume, while the overall number of shares traded has declined.

A subset of quantitative trading known as high-frequency trading accounted for 52 percent of May's average daily trading volume of about 6.73 billion shares, Tabb said. During the peak levels of high-frequency trading in 2009, about 61 percent of 9.8 billion of average daily shares traded were executed by high-frequency traders.

To be sure, not everyone on Wall Street is giving ground to the machines so easily.

AllianceBernstein analysts made the case in an April 28 note that artificial intelligence is unable to generate significantly different results — by the mere fact that analyzing more and more data results in increasingly similar strategies.

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Markets Await Fed Moves To Trim Balance Sheet

Most analysts expect modest market effect as Fed prepares to announce interest-rate rise and wind-down of bond holdings.

By Michael S. Derby
The Wall Street Journal
June 14, 2017

With the Fed on track to announce a strategy for shrinking its big bond holdings, attention is shifting from how it will work to how it will affect financial markets: Will it be a snooze or a storm?

Fed officials are hoping for the former, seeking to avoid a replay of the 2013 “taper tantrum” that occurred when the prospect of declining central-bank bond purchases triggered global market convulsions, including big capital outflows and currency drops in emerging markets.

Many analysts expect a modest effect on markets, a view shared by Fed officials who believe their ample guidance about their plans should limit any negative reaction. Some caution, however, that they see potential for turbulence if investors are too complacent about preparing for the Fed’s plans.

The Fed is likely to announce Wednesday, at the end of its two-day policy meeting, that it is raising its benchmark short-term interest rate by a quarter percentage point to bring it to a range between 1% and 1.25%, and signal that it expects about one more such increase this year.

Fed officials have said for months they were discussing how to reduce the balance sheet, and in May outlined a proposed approach that would let increasing amounts of securities mature over time. They could announce the adoption of the plan as soon as Wednesday.

The Fed’s portfolio of assets grew to $4.5 trillion currently from around $800 billion before the crisis through a series of bond-buying programs aimed at lowering long-term interest rates. Allowing those assets to roll off could push up long-term rates.

The Kansas City Fed estimated in early May that shrinking the holdings by $675 billion by 2019 would have the effect of a one-quarter-percentage-point increase in the Fed’s benchmark short-term interest rate. The Fed has raised the rate in three such increments since December 2015.

A mid-May Wall Street Journal survey of private economists found half of respondents reckoned the wind-down process would boost the yield on the 10-year Treasury note by just 0.2 percentage point or less over time.

A recent Fed board paper estimated that the expansion of Fed bond holdings since the crisis likely lowered the yield on the 10-year Treasury note by a percentage point from where it would otherwise have been. By 2023, the paper said, the yield would still be about a quarter percentage point lower, all else being equal, despite an anticipated shrinkage in the balance sheet.

Fed officials welcome the markets’ muted response so far. It “suggests that there need not be a major reaction” when the process actually starts, Fed governor Jerome Powell said earlier this month.

The road could turn bumpier, however. Officials haven’t revealed several key details that could influence the market effects, including when the process begins, its pace and the likely size of the balance sheet at the end.

Some analysts worry about the disconnect between current easy financial conditions and Fed efforts to tighten them. Stocks have climbed recently, yields have fallen and volatility is low, despite recent Fed rate increases and plans for more.

The gap could mean markets aren’t ready for the Fed to start reducing its balance sheet.

“Markets are overlooking both the Fed’s resolve to normalize policy and the impact their receding from bond markets will have,” Shehriyar Antia, chief market strategist with the Macro Insight Group, wrote to clients. “The longer it takes for market expectations to converge with the Fed’s policy trajectory, the greater the potential for an abrupt price move.”

Some uncertainty about the effects of the wind-down stems from the operation’s unprecedented scale. Before the crisis, the Fed bought and sold almost only Treasury securities to adjust short-term rates, and the relative size of those interventions was small.

Also, shrinking the balance sheet is only one way the Fed is trying to reduce the economic stimulus it is providing as the recovery gains strength. Fed officials see the slow growth and ebbing inflation of recent months as likely to be transitory, but some outside analysts and investors aren’t convinced.

Some analysts note the process of unloading Treasurys and mortgage-backed securities markets could affect their relevant markets differently. While the Treasury market is vast and unlikely to be much affected by the Fed’s action, the central bank’s presence in the mortgage market is bigger.

Dallas Fed President Robert Kaplan, a former vice chairman at investment bank Goldman Sachs Group Inc., acknowledged the challenge in comments to reporters recently. “We would like to do this in a way that minimizes the impact on trading levels and the functioning of the Treasury market and mortgage-backed securities markets,” he said. “I believe we can do that.”

Article Link To The WSJ;

Democratic Lawmakers Sue Trump Over Foreign State Payments To Businesses

By Julia Harte
June 14, 2017

More than 190 Democratic lawmakers sued President Donald Trump in federal court on Wednesday, saying he had accepted funds from foreign governments through his businesses without congressional consent in violation of the U.S. Constitution.

The complaint said Trump had not sought congressional approval for any of the payments his hundreds of businesses had received from foreign governments since he took office in January, even though the Constitution requires him to do so.

The White House did not immediately respond to requests for comment but has said Trump's business interests do not violate the Constitution. The Trump Organization has said it will donate profits from customers representing foreign governments to the U.S. Treasury but will not require such customers to identify themselves.

At least 30 U.S. senators and 166 representatives are plaintiffs in Wednesday's lawsuit, representing the largest number of legislators ever to sue a U.S. president, according to two lawmakers who are among the plaintiffs.

The Constitution's "foreign emoluments" clause bars U.S. officeholders from accepting payments and various other gifts from foreign governments without congressional approval.

"The president’s failure to tell us about these emoluments, to disclose the payments and benefits that he is receiving, mean that we cannot do our job. We cannot consent to what we don’t know," said Senator Richard Blumenthal, one of the lawmakers bringing the lawsuit, in a conference call on Tuesday.

Representative John Conyers, another plaintiff, added: “President Trump has conflicts of interest in at least 25 countries, and it appears he’s using his presidency to maximize his profits."

The Justice Department declined to comment.

Similar lawsuits have been filed in recent months by parties including a nonprofit ethics group, a restaurant trade group, and the attorneys general of Maryland and the District of Columbia.

They allege that Trump's acceptance of payments from foreign and U.S. governments through his hospitality empire puts other hotel and restaurant owners at an unfair disadvantage and provides governments an incentive to give Trump-owned businesses special treatment.

Rare To Sue President

In a motion to dismiss one such lawsuit on Friday, the Justice Department argued that the plaintiffs had not shown any specific harm to their businesses, and that Trump was only banned from receiving foreign government gifts if they arose from his service as president.

On Monday, White House press secretary Sean Spicer said "partisan politics" was behind the lawsuit by the Maryland and District of Columbia officials.

Lawmakers rarely sue the president, so there are few federal court decisions the legislators can cite to prove their legal standing to bring Wednesday's case, said Leah Litman, an assistant professor specializing in constitutional law at the University of California, Irvine.

"But the constitutional provision they're suing to enforce gives them a role in how it's carried out, and that gives them a powerful standing argument," Litman said.

The lawmakers in Wednesday's lawsuit will be represented in court by the Constitutional Accountability Center, a public interest law firm in Washington. Each lawmaker is paying a share of the legal fees from personal or campaign accounts.

Article Link To Reuters:

Italy's Got A Crush On Berlusconi (Again)

The phoenix of Italian politics rose again in Sunday's local elections.

By Ferdinando Giugliano
The Bloomberg View
June 14, 2017

The most eye-catching result of Sunday's round of local elections in Italy was the poor showing of the Five Star Movement. The anti-establishment party that has shaken Italy's political system made it to the second round in only one of the main cities holding elections -- including Genoa, the home town of its founder, the comedian Beppe Grillo.

But the most interesting story coming out of Sunday's vote is not the alleged demise of Grillo but the comeback of the phoenix of Italy's politics, Silvio Berlusconi. His center-right coalition looks set to score a series of important wins in the second round, just months before Italy's forthcoming general election.

There is no doubt that Sunday's result has been a disappointment for the Five Star Movement. Indeed, there are plenty of good reasons why Italians may have become tired of them: After four years in parliament, voters may no longer be willing to give the party a blank check. Their experience in running Rome and Turin has been disappointing. From the Netherlands to France, the economic recovery across the euro zone is taking some wind out of the sails of populist parties, including Five Star.

It would be a mistake, however to read too much into this result. The Five Star Movement has rarely done well in local elections, with the exception of the big wins scored in Rome and Turin last year. In the 2013 general elections, Five Star came within a whisker of being Italy's largest party. Yet, in a round of municipal votes held only a few months later, Grillo's party only took control of two out of 92 large towns, according to data collected by the think tank Demos & Pi. Even in 2016, when Five Star made world-wide headlines with a symbolic triumph in Italy's capital city of Rome and in Turin, the party only won in other 17 out of 141 large towns.

Partly this is because Five Star has always benefited from the protest vote, which can be weaker in local elections in Italy. They have also struggled to field good candidates, of particular importance when a city is picking its major. Finally, the party has been much better at maintaining its internal cohesion at national than at local level: In Genoa, for example, there was a split over who the right mayoral candidate should be.

The real lesson from Sunday's local vote comes from another side of the political spectrum. The center-right coalition between Forza Italia and the Northern League has bounced back and now looks as a serious contender to former Prime Minister Matteo Renzi's Democratic Party. Having been kicked out of government at the height of Italy's sovereign debt crisis, and out of parliament following a sentence for tax fraud, Berlusconi, now 80, may well be back.

Berlusconi's enduring appeal says much about his ability as a campaigner. Recently, he appeared in a video cuddling a lamb and feeding it with a baby bottle - a shameless attempt to win over the vegetarian vote. However, it also shows how moderate voters have become disillusioned with Renzi's promises to turn Italy around and are now flocking back to the center-right.

The alliance between the Northern League and Forza Italia will be harder to replicate at the national level, given the League's commitment to take Italy out of the euro, which Forza Italia does not fully share. Berlusconi cannot run in the 2018 general election because of a ban from public office, and it's not clear the two parties can agree on a suitable candidate.

However, Sunday's elections point to a strengthening of Italy's three-way split between the center-left, the center-right and the Five Star Movement. For all its history of instability, Italy's political spectrum has rarely looked more confused.

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Trump Is Too Late To Bring Back Coal

Coal isn't coming back. Technology and demand won't let it.

By Justin Fox
The Bloomberg View
June 14, 2017

There seems to be little doubt that Barack Obama's energy and environmental policies had a significant impact on how electricity is generated in the U.S. Tougher air-pollution rules, subsidies for wind and solar power, and a commitment to reduce carbon emissions coincided with a fracking-driven boom in natural gas production to shift the fuel mix in a big way.

Now Donald Trump is president. He is an avowed friend of coal who has already signaled that he wants to pull the U.S. out of the Paris Agreement on climate change and put a stop to the Clean Power Plan that Obama's Environmental Protection Agency adopted to force continuing declines in carbon emissions by utilities. He also hates windmills.

So why is it that all of the people I've talked to and heard speak on panels this week in Boston at the annual convention of the Edison Electric Institute, a utilities trade group, seem to think the shift toward renewables and away from coal is just going to keep going?

Mainly because they think Trump is too late (and my Bloomberg View colleague Noah Smith agrees). "We’re over the tipping point now," said Jan Vrins, head of the global energy practice at the consulting firm Navigant. "I think the train has left the station." Said Gerry Anderson, chief executive officer of Detroit-based utility DTE Energy Co.: "The administration can’t turn a 70-year-old coal plant into a 20-year-old coal plant."

It's not that the new administration won't be able to slow things down. Regulatory policies do matter. It's just that Obama seems to have seized a moment of opportunity when regulatory policies and subsidies mattered most, 2 but now other factors predominate. Vrins again: "We talk about three buckets: policy, technology and market demand. Tech and market demand are driving it now."

The basic story is this: Since the advent of electrical utilities in the U.S., burning coal has been the country's chief means of generating power. 3That means most coal plants have been around for a while. When they break down, utilities now have all sorts of reasons not to build new ones. During the Obama years, tough regulation of mercury and other pollutants was not only one of those reasons, but it also accelerated the retirements of otherwise still-functional plants. The American Coalition for Clean Coal Electricity sifted through investor and regulatory filings and found that utilities attributed three-fifths of the coal retirements since 2010 to EPA regulations.

Unlike the carbon-focused Clean Power Plan, which was tied up in court even before Trump was elected, most of those rules are already fully in place and will be hard to remove. Meanwhile, there are lots of other factors weighing against building new coal plants. One is the likelihood that, once Trump is out of office, the federal government will go back to targeting carbon emissions. In the meantime, lots of state and local governments are continuing to push for more use of renewables in power generation. Customers are clamoring for it, too, as long as it doesn't cost more. And because of big efficiency improvements in wind and solar (and, yes, federal and state subsidies, although those are getting less important over time), it doesn't cost more.

So when a utility needs to "invest in more modern generation facilities," said DTE Energy's Anderson right after his comment about 70-year-old coal plants, "the choices for new generation are natural gas and renewables."

This isn't to say that everyone in the electrical utility industry is equally enthusiastic about all aspects of this transition. The rapid turn to natural gas as an electricity source, especially in the Northeast, has raised lots of concerns about reliability. "During cold periods, there’s not enough capacity in those pipes to bring in all the gas we need," said Gordon van Welie, president and CEO of New England's regional transmission organization. The rise of wind and solar has resulted in negative prices for power in some areas when the wind is blowing especially hard or the sun is shining especially strongly -- which isn't a great thing for power markets. The growth of distributed energy generation and storage, and the state subsidies that support it, brings all sorts of headaches for utilities as well as opportunities.

Utilities have also been coping for the past decade with a decline in per-capita electricity use in the U.S., driven by efficiency gains and new technologies such as LED lightbulbs. That actually may be one more reason, though, for them to embrace the transition away not just from coal but also from fossil fuels in general. The only way to achieve sharp drops in overall carbon emissions is for electrification to "move more deeply into transportation, heating, industry," said Susan Tierney, a veteran federal and state energy official who is now a senior adviser at the Analysis Group, a consulting firm. So electrical utilities have an opportunity to reverse their demand downtrend in a big way -- but only if the electricity they generate is largely carbon-free.

Put it all together and, as EEI senior vice president Philip Moeller summed it up for me, "the cost of renewables has come down significantly and customers want them, and those trendlines are going to continue." They're not always going to continue uninterrupted -- as you can see in the above chart, natural gas has actually lost ground to coal in recent months as rising gas prices drove utilities to use less of it. I guess it's also possible that those in the electrical utility business are underestimating the regulatory changes in store from the Trump administration. But it still seems quite significant that the people who generate the nation's electrical power appear to have no plans to halt the transition away from coal and toward wind and solar.

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