Tuesday, June 20, 2017

Wednesday, June 21, Morning Global Market Roundup: Oil Slump Spooks Investors; China Stocks Underwhelmed By MSCI

By Wayne Cole
June 21, 2017

A renewed slump in oil prices to seven-month lows put Asian investors on edge on Wednesday, overshadowing a decision by U.S. index provider MSCI to add mainland Chinese stocks to one of its popular benchmarks.

The slide in energy costs boosted bond prices and flattened yield curves as investors priced in lower inflation for longer, while safe-haven flows underpinned the U.S. dollar.

The spread between yields on U.S. five-year notes and 30-year bonds US5US30=TWEB shrank to the smallest since 2007 as investors wagered the Federal Reserve might have to delay further rate hikes.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS slipped 0.7 percent, with Australia's commodity-heavy market down 1.1 percent . Japan's Nikkei .N225 eased 0.2 percent.

Oil had shed 2 percent on Tuesday as increased supply from several key producers overshadowed high compliance by OPEC and non-OPEC producers on a deal to cut global output.

The drop took U.S. crude down 20 percent from its recent high and thus into official bear territory, a red flag to investors who follow technical trends.

On Wednesday, Brent LCOc1 was flat at $46.02 a barrel, while U.S. crude futures CLc1 added 4 cents to $43.55.

The hit to energy stocks saw the Dow .DJI end Tuesday down 0.29 percent, while the S&P 500 .SPX eased 0.67 percent and the Nasdaq .IXIC 0.82 percent. E-Mini futures for the S&P 500 ESc1 were a fraction lower on Wednesday.

The acceptance of some Chinese A shares into MSCI's Emerging Markets Index was seen as a symbolic win for Beijing after three failed attempts. Yet the step is still a small one.

Only 222 stocks are being included and, with a weighing of just 5 percent, they will account for only 0.73 percent of the Emerging Markets Index .MSCIEF.

MSCI estimated the change, which does not happen until June next year, would drive inflows of between $17 billion and $18 billion. China's market cap is roughly $7 trillion.

The index provider set out a laundry list of liberalization requirements before it would consider further expansion.

"We suspect that it will be a long time before this happens," wrote analysts at Capital Economics in a note.

"While China's weighting in the MSCI Emerging Markets Index may ultimately rise to 40 percent or so, this rise is likely to be slow," they added. "The upshot is that any initial boost to equities is likely to be small."

The initial reaction was indeed restrained, with China's CSI300 index .CSI300 up 0.1 percent.

MSCI also said it would consult on adding Saudi Arabia to the benchmark and that Nigeria will remain a frontier market, But it shocked many emerging market investors by failing to upgrade Argentina from the frontier market category.

In currency markets, the flight from oil benefited the U.S. dollar -- the two often move inversely. Against a basket of currencies, it was holding at 97.746 .DXY having touched a five-week peak overnight.

The euro stood at $1.1134 EUR= after hitting a three-week low, while the dollar was steady on the yen at 111.39 JPY=.

Sterling GBP= was nursing losses at $1.2626. It took a spill after Bank of England Governor Mark Carney hosed down speculation that he might soon back higher interest rates, saying he first wanted to see how the economy coped with Brexit talks.

Article Link To Reuters:

Oil Holds Near Multi-Month Lows As Glut Fears Persist

By Aaron Sheldrick
June 21, 2017

Oil prices held around multi-month lows in early Asian trading on Wednesday as investors discounted evidence of strong compliance by OPEC and non-OPEC oil producers with a deal to cut global output.

Brent LCOc1 was down 6 cents at $45.96 barrel. The global benchmark ended down 89 cents, or 1.9 percent, on Tuesday at its lowest settlement since November.

U.S. crude futures CLc1 for August were trading down 3 cents at $43.48. The July contract, which expired on Tuesday, settled down than 2 percent at its lowest since September.

The Organization of the Petroleum Exporting Countries and other producers agreed to cut output by 1.8 million barrels per day (bpd) for six months from January and compliance with the agreement has reached more than 100 percent.

"The lack of a positive response in oil prices clearly suggests market participants are not convinced that the OPEC's efforts will help shore up prices in a meaningful way in the short-term as shale supply continues to rise in the U.S.," said Fawad Razaqzada, market analyst at futures brokerage Forex.com.

"Unless we see a marked reduction in crude stockpiles, the possibility of further short term falls in the price of oil cannot be ruled out," he added.

The American Petroleum Institute said on Tuesday U.S. crude stockpiles had dropped more than forecast.

A government report is due at 10:30 a.m. EDT (1430 GMT) on Wednesday and the official figures often differ sharply from those of the industry group.

OPEC and non-OPEC oil producers' compliance with the output deal has reached its highest in May at 106 percent last month, a source familiar with the matter said on Tuesday.

OPEC compliance with the output curbs in May was 108 percent, while non-OPEC compliance was 100 percent, the source said. Another source confirmed compliance by all producers in May was 106 percent.

Article Link To Reuters:

Oil's Drop Back Into A Bear Market Could Slow Down U.S. Drilling

-- U.S. oil producers may be looking to reduce spending and trim back drilling plans for next year, as oil prices fall sharply.
-- Oil futures fell into a bear market, and many U.S. energy stocks set new 52-week lows.-- Analyst say oil could briefly break $40 but it's not expected to stay there.

June 21, 2017

Just a few months ago, oil prices were above $50 and there was a swagger in the step of the U.S. shale industry.

But that has changed, now that prices have dipped precariously close to $40 per barrel, and threaten to go even lower. Many producers consider $40 as the line they cannot cross and still make a profit, so it will impact U.S. oil production if prices remain low.

"These are financial decisions. What was becoming unbridled confidence will be less unbridled," said Daniel Yergin, vice chairman of IHS Markit.

West Texas Intermediate futures for August were trading at just above $43 per barrel Tuesday, and prices were down about 2.5 percent, as the July contract expired. WTI has fallen about 20 percent from the peak it made in January, just as OPEC and non OPEC producers began a program to cut production by 1.8 million barrels a day.

"It's clear the oil price is not only measuring supply and demand. It's taking the temperature of sentiment and sentiment is overwhelmingly negative now," said Yergin.

The agreement reached late last year between OPEC, Russia and other producers temporarily kept oil in the $50s per barrel, and that encouraged U.S. shale drillers to crank up production. U.S. oil output jumped, reaching 9.3 million barrels a day this month, after troughing at about 8.5 million barrels a day last September.

Oil output, however has been rising, due to higher production in the U.S. and increased output from Libya and Nigeria.

"The global guys have been much more restrained. The U.S. guys are the ones that have been spending like crazy because of the combination of shale; the better wells they are drilling and the lower costs they've had. The U.S. guys built a better mouse trap but even that better mouse trap gets challenged," said Daniel Pickering, president of Pickering, Tudor, Holt.

Pickering's firm will be hosting a two-day industry conference in Houston starting Wednesday, and he expects to hear a changed mood from producers.

"We may get some signs that U.S. guys are going to take a breather on spending," said Pickering. "U.S. rig count is up 22 weeks in a row. One of these days we're going to have a down rig count because the U.S. guys are scared enough."

A number of analysts said U.S. crude should hold above $40, but it could fall into the $30s briefly.

"It's hard to see the U.S. sustainably below $40. The reason being even though you have a lot of efficiencies in the system now, that is a number at which a lot of the really best spots in the U.S. stop making money," Pickering said, noting that capital market access would be difficult at that point. "If the world is worried the U.S. is now the swing player, oil in the $30s is going to make that swing producer slow down."

The S&P energy sector was down 1.2 percent in afternoon trading Tuesday, about a percent better than early morning lows. In early trading, 11 energy companies in the S&P 500 hit fresh 52-week lows. Schlumberger and Range Resources were at lows last seen in January, 2016. Marathon, Concho Resources and Anadarko were at the lowest levels since May, 2016.

"Quite honestly OPEC is done in terms of being able to support the price," said Kyle Cooper, managing director, research at IAF. "They can still prevent a collapse but they can't support the price they want because the price they want is far above what U.S. oil needs, to be able to produce."

Yergin said he expects to see a cut back in U.S. drilling if the price remains low.

"The impact is not coming tomorrow or next week, but this will have a big impact on what happens next year. Who is going to have the same confidence they had four weeks ago?" said Yergin.

He said OPEC may not do anything in response, though it could have an emergency meeting and consider cutting back even more on production. "I have a little trouble seeing what they would do. If I were them I would take the long view and say this was good," he said, of the shale shakeout.

Analyst say the market should rebalance but it is taking much longer than expected. "OPEC got what they wanted. They got prices up, and U.S. oil producers said thank you very much. They elevated it long enough to get hedges in place, plans in place and we 're only 300,000 barrels from the peak of recent oil production," he said.

Cooper said many of the drillers have hedges that will allow them to continue with plans this year, and the impact of reduced activity from low prices would come in 2018 if they continue to be low, he said.

"I think the answer is even with hedges, nobody hedges everything. Folks very seldom hedge 100 percent of their production and when you get scared, you get scared," he said.

Article Link To CNBC:

Supreme Court Ruling Threatens Massive Talc Litigation against J&J

By Nate Raymond
June 21, 2017

Johnson & Johnson is seizing upon a U.S. Supreme Court ruling from Monday limiting where injury lawsuits can be filed to fight off claims it failed to warn women that talcum powder could cause ovarian cancer.

New Jersey-based J&J has been battling a series of lawsuits over its talc-based products, including Johnson's Baby Powder, brought by around 5,950 women and their families. The company denies any link between talc and cancer.

A fifth of the plaintiffs have cases pending in state court in St. Louis, where juries in four trials have hit J&J and a talc supplier with $307 million in verdicts. Those four cases and most of the others on the St. Louis docket involve out-of-state plaintiffs suing an out-of-state company.

On Monday, the Supreme Court ruled 8-1 in a case involving Bristol-Myers Squibb Co that state courts cannot hear claims against companies that are not based in the state when the alleged injuries did not occur there.

The ruling immediately led a St. Louis judge at J&J's urging to declare a mistrial in the latest talc case, in which two of the three women at issue were from out of state. It also could imperil prior verdicts and cases that have yet to go to trial.

"We believe the recent U.S. Supreme Court ruling on the Bristol-Myers Squibb matter requires reversal of the talc cases that are currently under appeal in St. Louis," J&J said in a statement.

The question of where such lawsuits can be filed has been the subject of fierce debate.

The business community has argued plaintiffs should not be allowed to shop around for the most favorable court to bring lawsuits, while injured parties claim corporations are trying to deny them access to justice.

Along with talc cases, large-scale litigation alleging injuries from Bayer AG's Essure birth control device in Missouri and California and GlaxoSmithKline's antidepressant Paxil in California and Illinois are examples of other cases where defendants could utilize the Supreme Court decision.

Although he declared a mistrial on Monday, St. Louis Circuit Judge Rex Burlison left the door open for the plaintiffs to argue they still have jurisdiction.

Plaintiffs lawyer Ted Meadows said he would argue the St. Louis court still had jurisdiction based on a Missouri-based bottler J&J used to package its talc products, which he said would create a sufficient connection to the state.

"It's very disappointing to mistry a case because the Supreme Court changed the rules on us," said Meadows.

The lawsuit decided by the high court on Monday involved claims against Bristol-Myers and California-based drug distributor McKesson Corp by 86 California residents and 575 non-Californians over the blood thinner Plavix.

Beyond Monday's mistrial, the Supreme Court's ruling could bolster a pending appeal by J&J of a $72 million verdict in favor of the family of Alabama resident Jacqueline Fox, who died in 2015. A Missouri appeals court had said in May it would wait until the Supreme Court issued its decision to decide the appeal.

J&J has won only one of the five trials so far in Missouri. It previously sought to move talc cases out of St. Louis, but the Missouri Supreme Court in January denied its bid.

The company has also cast the St. Louis court as overly plaintiff-friendly and has allowed evidence linking talc to cancer that was rejected by a New Jersey state court judge overseeing over 200 talc cases. The plaintiffs are appealing.

The talc verdicts against J&J led the business-friendly American Tort Reform Association last year to declare the St. Louis state court the nation's top "Judicial Hellhole."

Corporations like J&J facing a large volume of cases in venues chosen by plaintiffs will likely cite the Supreme Court to try to dismiss those claims, said Rusty Perdew, a defense lawyer at the law firm Locke Lord.

"You have a bunch of defendants who can go back and say, 'Judge, you got that wrong and you're going to have to dismiss claims by all those plaintiffs,'" he said.

Article Link To Reuters:

Republican Wins Costly Congressional Race In Georgia

By Andy Sullivan
June 21, 2017

Republican Karen Handel won a hotly contested Georgia congressional race on Tuesday, CNN reported, fending off a Democratic challenge in a race that was widely seen as a referendum on President Donald Trump.

With more than 65 percent of the votes counted, CNN predicted that Handel, a former Georgia secretary of state, would defeat Democrat Jon Ossoff, a political newcomer who sought to wrest control of a suburban Atlanta district that has elected Republicans to Congress since the 1970s.

Article Link To Reuters:

As iPhone 8 Looms, Firms Scramble To Lock Up Memory Chip Supply

By Se Young Lee
June 21, 2017

Global electronics makers are scrambling to stock up on memory chips to keep production lines running as Apple Inc's (AAPL.O) new iPhone 8 launch later this year threatens to worsen a global squeeze on supply.

While heavyweights such as Apple and Samsung Electronics Co Ltd (005930.KS) - which is also the world's top memory chip maker - will not be seriously hit, industry sources and analysts say some electronics makers are paying a premium to lock into longer-term contracts.

Others are placing orders earlier than before to ensure their perilously low inventories do no dry up completely.

"After the supply shortages emerged we brought forward our procurement decisions ... to ensure a stable supply," smartphone and personal computer maker LG Electronics Inc (066570.KS) said in a statement, adding it had pushed up quarterly purchase decisions by about a month.

Chip manufacturing technologies are growing increasingly complex, raising investment costs yet providing less output growth as some suppliers struggle to improve yields. This has caused some chip prices to double or triple from a year earlier.

Some analysts say device makers could be forced to cut down on the amount of DRAM chips, which help devices perform multiple tasks at once, or NAND chips that are used for long-term data storage, on new products if the cannot get enough chips.

A chip supplier source told Reuters a handful of clients have moved to 6-month supply agreements, accepting higher prices than the customary quarterly or monthly deals, to make sure they get enough memory chips for their products.

"The problem will be more acute for the NAND market, where the iPhone remains a critical source of demand given the huge sales volumes and recent moves to increase storage capacity on the device," said the source, who declined to be identified as he was not authorized to speak publicly on the matter.

Inventory Squeeze

Signs of stress have already emerged: Huawei Technologies Ltd [HWT.UL] was criticized by consumers after it was discovered the Chinese firm used a mix of less advanced and powerful chips in its flagship P10 model that led to significant variations in performance.

Huawei did not respond to requests for comment on its memory procurement plans.

About 18 percent of the global annual supply of NAND chips is bought by Apple, analysts say. In recent years, electronics makers have typically built up inventory during the first half to avoid being squeezed by Apple, which generally unveils its latest iPhone model in September.

But the shortage of chips in the first half of the year has left many scrambling.

Should the U.S. giant opt to push out more iPhones than usual or further increase the portion of high-storage models, that could further squeeze out other companies. Some analysts estimate Apple could ship as many as 100 million new iPhone 8s this year, compared with the 82.3 million iPhone 7s that Cowen & Co. estimates for 2016.

"For the iPhone 8 launch there have been specific references to this by customers and distributors as a reason for longer delivery times and shortages," said Tobey Gonnerman, executive vice president at U.S.-based component distributor Fusion Worldwide.

"Buying buffer stock and holding product in hubs to protect against anticipated delivery interruptions has certainly become more common in recent months."

Apple declined to comment on its memory chip purchasing plans.

No Relief In Sight

Chipmakers have been allocating more capital in recent years to boost production of NAND chips, where the shortage has been acute due to strong demand for high-end data storage products. Samsung Electronics will start NAND production at a $14 billion South Korea plant in the second half, while SK Hynix (000660.KS) will start making its new high-end NAND products in coming months.

But analysts say meaningful new supply is unlikely to materialize until 2018.

SK Hynix told Reuters in a statement it has been meeting delivery dates but acknowledged supply conditions were tight, noting its inventory levels were at an all-time low and unlikely to increase in the near-term given continued demand.

Samsung declined to comment on chip procurement for its electronic devices or inventory levels for its memory business.

Smartphone makers in China are also locked in an arms race to provide the most memory, which could further exacerbate the squeeze as they seek to counter the iPhone.

Some investors and analysts have voiced concerns about potential "de-speccing," where product makers cut back on memory to cope with the shortages or margin pressures. IHS analyst Walter Coon said some firms were starting to prepare to offer products with lower memory content if market conditions remain tight.

But analysts also say manufacturers will be loath to cut back on memory as such a move would be deeply unpopular, saying the firms are more likely to just not upgrade memory on new models.

Article Link To Reuters:

The Amazon Approach To Groceries Won't Replace Stores

It's a model that could thrive in dense, affluent areas. Most areas are neither dense nor affluent.

By Megan McArdle
The Bloomberg View
June 21, 2017

For a certain kind of urban professional, Amazon and Whole Foods are brands that define the consumption of staple goods: the weekly trip to pick up cheese, produce, maybe some pasture-raised organic beef; and the nice UPS man dropping off everything else, from toilet paper to truffle oil. On Friday, those folks learned that they are facing a future of truly one-stop shopping: Amazon.com Inc. plans to acquire Whole Foods Market Inc. for $13.7 billion.

But what about the rest of America? Well, if you happen to work for rival grocery chains, the news is not good. Competitors from Costco to Kroger to Dollar General saw significant chunks knocked off their market capitalization. Other casualties may include Walmart, the $15-an-hour minimum wage (Amazon is aggressively experimenting with cashierless stores), and the rather unique corporate culture that drives Whole Foods.

Some of these predictions are more likely than others. Cashierless grocery stores may well be on the horizon, but -- thanks to trends like, er, $15-an-hour minimum wages -- they were probably going to come whether or not CEO Jeff Bezos decided to buy Whole Foods.

Some of the stores that took big hits on Friday make sense, but others seem like overreactions; the Dollar General customer is, in general, a very, very different kind of person than the folks who regularly shop at Whole Foods, or for that matter, at Amazon.

And while corporate culture is always an issue in any merger, and Amazon’s competitive pressure-cooker style certainly seems like a poor fit for the cooperative, egalitarian climate that Whole Foods has cultivated, it’s worth noting that in at least two acquisitions -- Zappos and the Washington Post -- Bezos seems to have adopted a “let you be you” policy, rather than attempting to turn them into little copies of the mother ship.

But what about the biggest fear of all: that this will turbo-charge Amazon’s rapacious conquest of retail markets, putting Main Street out of business, and forcing the rest of us to rent air from Bezos? I can certainly see why that worries people. But before we start wailing about Amazon’s imperialist retail ambitions, there’s something we should remember about this acquisition: It might not do Amazon all that much good.

Oh, I’m familiar with all the reasons people think this is a smart deal. Amazon, like Sears before it, has been looking to turn a mail-order business into bricks and mortar, and Whole Foods brings the company hundreds of prime locations in affluent areas, along with considerable expertise in grocery operations. Despite the dismal revenue numbers Whole Foods has recently been posting, that expertise is insanely valuable, because groceries are one of the hardest businesses to do well in. Margins are razor-thin, which means that they can easily go from black to red thanks to shrinkage (theft) and spoilage (about what it sounds like).

A few years back, I interviewed an executive at an online grocery retailer. When I asked how concerned they were about competition from Amazon, the answer was “not very”; it’s just too darn hard to make money in the business, so without a lot of long-honed skills at things like inventory management, companies are apt to lose money.

Whole Foods has that expertise, and as Amazon tries to push deeper into the grocery market, it will no doubt make use of it. At the same time, it’s worth noting the reason that Amazon is able to buy Whole Foods in the first place: It’s facing a lot of tough competition that makes it hard to grow profits.

Whole Foods became a behemoth by giving shoppers a mass-upscale, mass-organic option they hadn’t had before. For a long time, that was a recipe for strong sales and a rising stock price. Unfortunately the revolution that the firm spawned in the grocery market is now eating its own children.

Grocery is a commodity business with few barriers to keep competitors from copying what you do, and maybe even improving on it. Whole Foods now faces pressure on its core business from four places: pure organic competitors, limited-format stores like Trader Joe’s, delivery services like Peapod and FreshDirect (and, to some extent, Amazon itself), and ordinary supermarkets that have beefed up their offerings of organic produce and exotic cheese. Most supermarket operators could say the same thing: No matter who you are, you’ve got more competition for your customers than you did 20 years ago, when grocers tended to compete more on things like “proximity” than on their fabulous selection of French wine.

Nor can Amazon simply overcome these challenges with the same core competencies that have allowed it to disrupt market after market. Grocery really is fundamentally different from other retail: The food has to be warehoused close to the consumer, who is not going to wait three days for a gallon of milk. Meanwhile, you can’t necessarily wring the kinds of efficiencies out of grocery pickers that Amazon has out of the staff in its warehouses, because if you grab and box groceries too fast, the customer is apt to end up with a delivery full of bruised apples, smashed raspberries, and tortilla chip dust. For the same reason, those boxes have to be delivered with much greater care (and refrigeration) than your typical Amazon package.

If you want to see just how hard this business is, look at Amazon Fresh, which began beta-testing in 2007, and is still available in only a handful of cities. Amazon simply hasn’t been able to disrupt the grocery market as quickly and efficiently as it has battered so many other sectors.

That’s not to say that Amazon won’t wring operational efficiencies out of Whole Foods, nor that the Whole Foods acquisition won’t help Amazon beef up its fledgling delivery service or its prototype for a store without checkout lanes. But even as we say that, we should note that paying someone else to grab your groceries is probably a fundamentally limited market niche, not the inevitable future to which all Americans can look forward.

It makes great sense in dense affluent areas, where there are a whole lot of houses within reasonable distance of your warehouse, and where those houses are filled with people who may not have cars, but do have incomes that allow them to pay a substantial premium for convenience. That describes a lot of neighborhoods in the U.S., many of which have a Whole Foods or two nearby. But it doesn’t describe anything like a majority of neighborhoods. In the rest of the country, traditional grocery retail is going to be the norm for a good long time, because it’s hard to see how Amazon can do to groceries what it has done to so many other businesses: leverage its vast economies of scale to make goods available to consumers more cheaply, even net of delivery costs.

On top of that, you have to add the integration difficulties of a merger, which so often mean that acquisitions destroy, rather than create, value. And even if Bezos manages to negotiate those challenges successfully, and do to grocers what he did to the big box stores, he will probably be confronted with a different sort of problem: the prospect of too much success.

All it has to do is get so big and powerful that the government starts a-fretting about monopoly. When that happens, look for the anti-trust muscles to flex, as they have against so many “unstoppable” giants before, from Standard Oil to Microsoft. If Bezos actually does manage to establish such dominance over so many major retail markets that the rest of us are genuinely at his mercy, then history suggests that the next development will be a long series of anti-trust disputes that sap corporate energy, block further expansions, and hamper the company’s ability to respond to emerging competitive threats. And dominance of a basic necessity like the grocery market seems a likely point at which regulatory trigger fingers would start to itch like a basketful of chiggers.

So while it’s possible that the Whole Foods acquisition is a stroke of strategic genius, it’s also possible that it may, in retrospect, turn out to be a bridge too far. Or more likely that it will turn out to be a mixed bag: costing some management headaches to keep a profit-challenged business going, without making or losing much money; enabling Amazon to get better at grocery delivery without making it strong enough to deliver a knockout blow to the competition. Twenty years from now, it seems likely that many people will be able to order up some groceries from Amazon. But it also seems likely that we’ll still be driving to a nearby grocery store to pick up that forgotten gallon of milk.

Article Link To The Bloomberg View:

Amazon Has At Least One Fed Official Rethinking Inflation

Chicago Fed president ponders technology-induced disinflation; Fed policy may need to be easier if competition curbs prices.

By Matthew Boesler
June 21, 2017

News that rocked the retail world last week is coming at just the wrong time for U.S. central bankers already puzzling over why inflation is conspicuously absent.

When online retail giant Amazon.com Inc. announced last Friday that it would purchase Whole Foods Market Inc., a plunge in retail and grocery stocks reinforced the disinflationary tone set by three straight months of disappointing data on consumer prices. It’s an example of the technological forces that are increasing competition and further limiting companies’ ability to pass on higher wage costs to customers.

“That normally indicates that somebody thinks that they are not going to be earning as much as they were,” Federal Reserve Bank of Chicago President Charles Evans said of the market reaction to the deal while speaking with reporters Monday evening after a speech in New York.

“For me, it just seems like technology keeps moving, it’s disruptive, and it’s showing up in places where -- probably nobody thought too much three years ago about Amazon merging with Whole Foods,” he said.

Evans, a voter on the Federal Open Market Committee this year who supported its decision to raise interest rates last week, says he is less confident than most of his colleagues that inflation will soon rise to their 2 percent target.

A big reason for his ambivalence: Deflationary competitive pressures could have become more important for the overall trend in prices than the so-called Phillips Curve relationship, which links inflation to the state of the labor market. That model, coined almost 60 years ago, is the basis for the Fed’s outlook for continued gradual rate increases.

In order for it to work, though, businesses need to be able to raise prices to offset increases in labor costs as unemployment falls and available workers become more scarce. But a stumble in corporate profit margins suggests companies are struggling to raise prices.

“That’s one of the things that makes me nervous, that I think there’s something possibly going on, some secular trend, that isn’t just a U.S. story,” Evans said.

“We know that technology is disruptive. It’s changing a number of business models that used to be very successful, and you have to wonder if certain economic actors can continue to maintain their price margins, or if they are under threat from additional competition,” he said. “And that could be an undercurrent for holding back inflation.”

Every indication from FOMC leadership is that continued tightening in the labor market will lead to higher inflation, despite the recent wobbles in the inflation data, which Fed Chair Janet Yellen called “noisy” in a press conference following last week’s meeting.

“We think if the labor market continues to tighten, wages will gradually pick up, and with that, we’ll see inflation get back to 2 percent,” William Dudley, who as New York Fed president is also vice chairman of the FOMC, said Monday in Plattsburgh, New York.

Such remarks reinforce expectations that policy makers will hike again before the end of the year, as signaled by their latest forecasts for interest rates.

Evans isn’t ready to abandon that logic yet, either, but he does sound more skeptical.

“I can’t say that the Phillips Curve isn’t going to lead to higher inflation, but I worry that it’s very flat and it’s not going to,” he told reporters Monday. “It’s still very early in this process.”

The Chicago Fed chief is not alone in thinking about the impact of disruptive technologies on prices. Dallas Fed President Robert Kaplan -- another FOMC voter this year -- describes such forces, and the uncertainty they generate, as currently the most intense he’s ever seen.

Ultimately, if the unemployment rate continues to fall and inflation doesn’t respond, the Phillips Curve may fall further out of favor as a guide to inflation dynamics, and by extension, interest-rate policy, as Evans hinted at Tuesday in a follow-up interview on CNBC.

“If that’s the case -- and I think that’s just speculative at this point -- then it means we need even more accommodation to get inflation up,” he said.

Article Link To Bloomberg:

Roughly $17 Billion Or More Could Now Flow Into Chinese Stocks

--- MSCI said it will add Chinese A shares to its benchmark emerging markets index beginning next year.
-- The index is tracked by about $1.6 trillion.
-- Billions are expected to flow into China's A shares as a result.

June 21, 2017

About $17 billion to $18 billion should initially flow into mainland China's stock market once some of those stocks are added to the key MSCI Emerging Markets Index, an MSCI executive said Tuesday.

MSCI announced earlier Tuesday a long-awaited decision in favor of adding stocks, known as A shares, to the firm's emerging markets index, which is tracked by an estimated $1.6 trillion. As a result, non-Chinese investors that follow the MSCI Emerging Markets Index must buy Chinese A shares to match the updated version of the index.

Due to limited access to the mainland Chinese stocks, foreign investors own less than 1.5 percent of that market, Chin Ping Chia, head of research for Asia Pacific at MSCI, said on a conference call with journalists after the inclusion decision was announced. He estimated $17 billion to $18 billion could flow into Chinese A shares.

MSCI's decision to add 5 percent of the floating market cap for 222 China A shares will eventually give mainland China a weight of 0.73 percent in the emerging markets index. Stocks on the list include Bank of China and Tsingtao Brewery.

Lucy Qiu, emerging markets strategist at UBS Wealth Management, said the MSCI decision should improve short-term sentiment for Chinese A shares. But she estimated that initial flows into China's mainland stock market will be far lower — around $7 billion to $8 billion.

The Shanghai composite has risen just over 1 percent so far this year, in contrast with 18 percent gains for the iShares Emerging Markets ETF (EEM) and a 9 percent rise for the S&P 500. A share U.S. ETFs such as Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR) and KraneShares Bosera MSCI China A ETF (KBA) climbed more than 1.5 percent in extended-hours trade.

"We believe our clients will benefit from today's decision to bring Chinese equities into mainstream investment. BlackRock has continued to support all opening of investment in China's onshore capital markets for a number of years," Ryan Stork, BlackRock chairman, Asia Pacific, said in a statement.

China already has the largest weighting in MSCI's Emerging Markets Index at nearly 30 percent, but the index only includes Hong Kong and U.S.- traded shares of Chinese companies. For the last three years, the index giant had decided against adding the mainland traded stocks.

MSCI plans to add the A shares in a two-step process next year, following reviews in May and August 2018. That's partly due to trade limits under the stock connect program that links Hong Kong's stock market with that of Shanghai and Shenzhen, Chia said. The development of the connect program was a major factor in MSCI's decision Tuesday, MSCI representatives said.

"We are very hopeful ... Chinese authorities will continue with the momentum" in opening up Chinese markets to foreigners, Sebastien Lieblich, global head of index management research at MSCI, said on the press call.

If China improves the ability of foreigners to access its markets, mid-cap mainland Chinese stocks could also be added to the emerging markets index, Lieblich said. In that case, mainland China would have a 1.4 percent weighting in the index overall, and he estimated inflows could roughly double to $30 billion to $35 billion.

That said, MSCI noted in the release that trade suspensions in some A shares and restrictions on creating related investment products remain issues China needs to resolve.

There is "constructive and cordial collaboration between MSCI and the Chinese regulator," Lieblich said, noting that the index giant doesn't dictate market changes. "What we are doing is providing feedback from international investors to them."

MSCI on Tuesday also decided not to add Argentina's stocks to the emerging markets index, while saying that country's stocks and Saudi Arabia's stocks would be part of next year's review for inclusion.

Lieblich said on the press call that the oil producing nation's highly anticipated Saudi Aramco initial public offering "will have absolutely no bearing on our decision to include the Saudi Arabia index into the EM index."

Article Link To CNBC:

China Secures MSCI Inclusion As $6.9 Trillion Market Goes Global

Index compiler gives the nod after three years of rejection; China has opened further to foreigners with Shenzhen link.

By Sam Mamudi and Ben Bartenstein
June 21, 2017

China’s domestic equities will join MSCI Inc.’s benchmark indexes after three failed attempts, a landmark step in the nation’s integration with the global financial system.

The decision, announced by the New York-based index compiler on Tuesday, will give China’s $6.9 trillion stock market a bigger role in everything from exchange-traded funds to 401(k) retirement plans. It also advances President Xi Jinping’s ambitions to make the yuan a global currency.

While China’s locally-traded A shares will comprise just 0.7 percent of MSCI’s global emerging-markets gauge, with 222 companies being added, the weighting could increase over time if the country enacts further reforms. The inclusion will be done in two steps: the first in May 2018 and the second in August of next year.

“International investors have embraced the positive changes in the accessibility of the China A shares market over the last few years and now all conditions are set for MSCI to proceed with the first step of the inclusion,” Remy Briand, the managing director and chairman of the MSCI Index Policy Committee, said in a statement.

Also Tuesday, MSCI put off decisions on whether to reclassify Argentina as an emerging market and to demote Nigeria to standalone status. It included Saudi Arabia on its watch list for potential classification as an emerging market.

The inclusion of Chinese shares punctuates an extraordinary period during which the country has sought to enter the mainstream of international finance while still maintaining a semblance of control over its markets. Since MSCI first considered adding Chinese shares to its indexes in 2014, the market has experienced an epic boom and bust, a bout of heavy-handed government intervention and -- more encouragingly for foreign investors -- a steady stream of initiatives to connect local exchanges to the outside world.

The MSCI inclusion "will provide a modest boost to sentiment and flows into China," said David Loevinger, a former China specialist at the U.S. Treasury who is now an analyst at fund manager TCW Group Inc. in Los Angeles. "More importantly it strengthens Chinese reformers that want to open China’s markets. The small index weight looks like a compromise between those asset managers that wanted China in and out."

MSCI’s announcement provided a small fillip to the offshore yuan and a bigger boost to U.S.-listed exchange-traded funds, with the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF jumping as much as 3 percent in post-market trading.

MSCI, which has been working directly with China’s securities regulator to resolve hurdles to inclusion since at least 2015, helped bridge the gap between Beijing and reluctant global asset managers with a less ambitious proposal unveiled in March.

To address investor concerns about the number of suspended shares, stocks halted for more than 50 days in the past 12 months weren’t eligible for inclusion. All companies to be added are large-cap shares accessible to foreigners through China’s cross-border exchange links with Hong Kong, including those with dual-listings.

"The next inclusion is probably going to have a larger inclusion factor -- it was 5% of the market cap of those large capitalization stocks -- and potentially, as well, the inclusion of the mid caps," Henry Fernandez, chief executive officer of MSCI, said in a Bloomberg Television interview. "The second category is something that we’re very focused on, we’d like to expand the universe of shares that are available to international investors."

The addition of mid-cap shares would depend on factors including improved accessibility to China’s stock market for overseas investors, the relaxation of daily trading limits, progress on trading suspensions and easing of restrictions on the creation of index-linked investment vehicles, according to MSCI’s roadmap.

International money managers can now buy and sell more than 1,400 domestic Chinese stocks after authorities opened the Shenzhen Connect in December, about six months after last year’s MSCI rejection. The first link with Shanghai started in late 2014.

Inclusion in MSCI indexes will spur about $8 billion to $10 billion more in fund flows to China’s A shares, according to Lucy Qiu, an analyst at UBS Wealth Management’s Chief Investment Office, which oversees strategy for $2.2 trillion in assets.

"Over the long term, assuming further liberalization and regulatory reform of the mainland stock markets, the depth of China’s A-share market could mean China gains substantial weight within those broader indices," said Nick Beecroft, an Asian equity portfolio specialist at T. Rowe Price.

Given their tiny initial weighting, domestic Chinese shares will be dwarfed by the nation’s overseas-traded stocks. The country already has the largest position in the MSCI Emerging Markets Index, thanks to Hong Kong-listed companies like Bank of China Ltd. that joined the gauge years ago. The country’s dominance has only increased recently with the addition of U.S.-traded firms including Alibaba Group Holding Ltd.

In 2017, internationally-listed Chinese stocks have proven a better bet than their local counterparts. The MSCI China Index has advanced 25 percent, trouncing a 1.2 percent gain in the Shanghai Composite Index.

For many investors, China’s local shares represent the future. Not only is the market massive -- the second-biggest worldwide after America’s -- it’s also home to many of the companies most aligned with China’s consumer and service industries, which are seen as key drivers of the $11 trillion economy’s long-term expansion. And while the yuan has been under pressure recently, so-called A shares in Shanghai and Shenzhen give global investors exposure to a currency that’s likely to play a growing role as China expands its economic clout overseas.

"This is the start of a process through which Chinese equities will achieve a prominence in global investors’ portfolios that reflects the size and significance of China’s domestic stock market and its economy," Helen Wong, HSBC’s Chief Executive of Greater China, said in a statement.

Article Link To Bloomberg:

Tuesday, June 20, Morning Global Market Roundup: Asia Shares Near Two-Year High As U.S. Hi-Tech Rebound Boosts Mood

By Hideyuki Sano 
June 20, 2017

Japan's Nikkei rose more than 1 percent to a near two-year high on Tuesday, encouraged by rebound in U.S. hi-tech shares as investors bet on solid growth in the economy and corporate profits globally.

European shares seen extending gains, with spread-betters expecting Germany's DAX to rise 0.2 percent from Monday's record closing high. France's CAC is expected to open 0.3 percent higher while Britain's FTSE is seen up 0.1 percent.

MSCI's broadest index of Asia-Pacific shares outside Japan held firm near a two-year high struck last week, but was little changed on the day.

Taiwan shares hit a 17-year high but gains in high-tech firms were offset by a decline in Australian shares.

A big focus for Asia is whether index provider MSCI will later in the global day open up its Emerging Markets Index to Chinese mainland shares which have restricted access for foreign investors.

Many investors expect the so-called A shares that make up the majority of China's stock market to likely be included after being rejected on three previous occasions.

The blue-chip CSI300 index of mainland stocks was down 0.2 percent.

Wall Street's S&P 500 and the Dow industrial average hit record highs as technology shares bounced back after some sudden falls earlier this month.

"Hi-tech shares just went through a correction. Their valuation is not that expensive, standing far below their levels at the peak of the dot-com bubble in 2000. Given that their profits are expected to see exponential growth in coming years, it is premature to say the rally in hi-tech shares is over," said Mutsumi Kagawa, chief global strategist at Rakuten Securities.

U.S. financial shares also gained as U.S. debt yields rose after New York Federal Reserve President William Dudley, a close ally of Fed Chair Janet Yellen, said U.S. inflation should rebound alongside wages as the labor market continues to improve.

The 10-year U.S. Treasuries yield edged up to 2.184 percent from a seven-month low of 2.103 percent touched on Wednesday, following surprisingly weak U.S. inflation data.

"Even though the Federal Reserve is about to shrink its balance sheet, possibly as soon as in September, U.S. bond yields are kept at low levels, which are very comfortable for stocks," said Norihiro Fujito, senior investment analyst at Mitsubishi UFJ Morgan Stanley Securities.

"Trade volume is light and whether the market continues to rise depends on whether large cap tech shares continue to rebound," he also said.

The rebound in U.S. bond yields helped to lift the U.S. dollar, which rose to 111.775 yen, its highest level in more than three weeks.

The euro traded at $1.1154, just above its two-week low of $1.11315 set on Thursday.

The British pound slipped slightly to $1.2735 from Monday's high of $1.2814, held back by uncertainty over domestic politics and over Britain's economic future, as formal Brexit negotiations got under way on Monday.

Oil prices flirted with this year's lows as market players saw more signs that rising crude production in the United States, Libya and Nigeria were undercutting OPEC-led efforts to support the market with output curbs.

Brent crude futures traded at $46.92 per barrel, flat on the day and not far from last week's low of $46.70 and five-month low of $46.64 touched in early May.

U.S. crude futures stood at $44.19 per barrel, less than a half cent above its five-month low of $43.76 set on May 5.

Safe-haven gold hit a one-month low of $1,243.2 an ounce as risk sentiment improved, before bouncing back a tad to $1,245.5.

Article Link To Reuters:

Oil Prices Hold Near Seven-Month Lows, Glut Keeps Dragging

By Aaron Sheldrick
June 20, 2017

Oil markets held around seven-month lows on Tuesday as investors focused on persistent signs of rising supply that are undermining attempts by OPEC and other producers to support prices.

Brent futures were up 4 cents at $46.95. On Monday, they fell 46 cents, or 1 percent, to settle at $46.91 a barrel.

That was their lowest since Nov. 29, the day before the Organization of the Petroleum Exporting Countries (OPEC) and other producers agreed to cut output for six months from January.

U.S. West Texas Intermediate crude futures were down 1 cent at $44.19 a barrel. They declined 54 cents, or 1.2 percent in the previous session, to settle at $44.20 per barrel, the lowest close since Nov. 14. The July contract will expire on Tuesday and August will become the front-month.

Both benchmarks are down around 15 percent since late May, when OPEC, Russia and other producers extended by nine months the cut in output by 1.8 million barrels per day (bpd).

"Recent data points are not encouraging," Morgan Stanley said in a research note. "Identifiable oil inventories - both crude and product in the OECD, China and selected other non-OECD countries - increased at a rate of (about) 1 (million bpd) in 1Q."

OPEC supplies jumped in May as output recovered in Libya and Nigeria, two countries exempt from the production cut agreement.

Libya's oil production has risen more than 50,000 bpd after the state oil company settled a dispute with Germany's Wintershall, a Libyan source told Reuters.

Analysts said rising U.S. crude production has fed the global glut. Data on Friday showed a record 22nd consecutive week of increases in U.S. oil rig numbers.

Still, Saudi Energy Minister Khalid al-Falih remained confident OPEC's cuts were working. The oil market is heading in the right direction but still needs time to rebalance, al-Falih told the London-based newspaper Asharq al-Awsat.

"In my opinion, market fundamentals are going in the right direction, but in light of the large surplus in stockpiles over the past years, the cut needs time to take effect."

Article Link To Reuters:

Shale's Record Fracklog Could Force Crude Prices Even Lower

Highest number of drilled-but-uncompleted wells in three years; Burst of new production could result in second half of 2017.

By David Wethe and Joe Carroll
June 20, 2017

There’s yet another concern growing as oil prices continue to erode: A record U.S. fracklog.

There were 5,946 drilled-but-uncompleted wells in the nation’s oilfields at the end of May, the most in at least three years, according to estimates by the U.S. Energy Information Administration. In the last month alone, explorers drilled 125 more wells in the Permian Basin than they would open. That represents about 96,000 barrels a day of output hovering over the market.

If OPEC thought shale was a thorn in its side before, just wait until U.S. explorers turn their spigots on full blast. Wells waiting to be fracked and flowing are an overhang that could mean a burst of new supply in the second half of the year and into 2018, according to Luke Lemoine an analyst at Capital One Securities Inc. in New Orleans.

"Even though rig counts have gone through the roof in the Permian, we really haven’t even felt the full production implications," said William Foiles, an analyst at Bloomberg Intelligence in New York. "We’ve only felt 70 percent of the rise in drilling."

Explorers generally start the drilling process with contractors such as Helmerich & Payne Inc. and Nabors Industries Ltd., using rigs to dig a vertical shaft that can drop 5,000 feet or more. They then build in a bend to extend the shaft sideways into a promising shale layer, a process that overall can take weeks.

Other service companies such as Schlumberger Ltd. and Halliburton Co.complete the process, using high-pressure machines that push in sand, water and chemicals to free up oil and natural gas that’s pumped to the surface. Until that final step occurs, the well is known as a DUC, a drilled-but-uncompleted asset, part of the so-called fracklog.

Oil prices have declined for four straight weeks as U.S. drillers continue to add rigs, blunting OPEC-led efforts to rebalance an oversupplied market. Last week was the 22nd in a row in which U.S. explorers boosted their rig count, the longest stretch of uninterrupted growth in more than three decades.

Prices fell 1.4 percent to $44.13 a barrel at 2:26 p.m. in New York. Explorers can afford to keep drilling with oil under $50, once considered a key price point for expansion, partly because of hedging, price insurance bought by companies when oil neared $55 at the end of last year.

Explorers have also cut the cost of drilling using new systems that make the process more efficient. In some shale plays, like the Permian, that’s dropped the break-even price to about $35. That new efficiency, though, has overwhelmed fracking firms.

Rising global oil stockpiles plunged the industry into its worst downturn in a generation three years ago, with prices falling as low as $26.05 on Feb. 11, 2016. Service companies were among the hardest hit, cutting more than 333,000 jobs globally and sidelining much of their machinery. Now, they’ve been caught short by the explosiveness of the U.S. shale rebirth.

“The pace at which operators can exploit this resource will depend on how quickly the services sector can bring back completion capacity and crews,” said Andrew Slaughter, executive director of the Deloitte Center for Energy Solutions in Houston, in a telephone interview.

Right now, that’s not expected until the second half of the year, when as much as another 2 million horsepower in equipment is made available, according to Capital One’s Lemoine. In addition to fixing up gear that that had been parked on the sidelines, fracking companies are methodically hiring and training workers.

As long as crude sticks above $40, shale drillers will continue boring new wells, adding to the overhang, according to Charles Cherington, co-founder of Argus Energy Managers, an alliance of private equity firms that invest in the oil explorers and suppliers.

Deal Extended

On May 25, the Organization of Petroleum Exporting Countries and partners including Russia agreed to extend the supply deal they forged last year to limit output as a way to bleed crude stockpiles and rebalance the market. The rising U.S. fracklog could threaten that push, Cherington said. Without deeper cuts, prices could fall low enough to crash the industry again, he said.

“This is still a very fragile industry,” Cherington said. “There will be casualties.”

The glut isn’t expected to balance out this year as earlier forecast, partly because the shale boom continues to crank out more crude. And if the price of oil continues to fall, dropping to $40 or below, explorers can now shift their spending to fracking crews from drilling rigs to make their money off that large untapped supply, Capital One’s Lemoine said.

It would likely take oil prices collapsing below $35 a barrel to keep shale companies from chewing into their unfracked inventory of wells and adding production to the global market, according to Foiles, the Bloomberg Intelligence analyst. "You can’t just look at the rig count anymore," he said.

Article Link To Bloomberg:

U.S. Drillers Are Hammering OPEC’s Plans

Rigs targeting crude in America climb for a 22nd straight week; Libya’s production rises to four-year high as fields resume.

By Meenal Vamburkar
June 20, 2017

Oil fell, extending four weeks of declines, as U.S. drillers continue adding rigs and Libya boosts output, blunting OPEC-led efforts to re-balance an oversupplied market.
The most important market news of the day.

Futures dropped 1.2 percent in New York after capping the longest run of weekly declines since August 2015. U.S. drillers targeting crude added rigs for a 22nd straight week, the longest uninterrupted stretch of growth in three decades, according to data from Baker Hughes Inc. on Friday. Libya is producing the most oil in four years after a deal with Wintershall AG enabled at least two fields to resume production.

Oil plunged below $45 a barrel last week after the U.S. Energy Information Administration said gasoline supplies surged to the highest level since mid-March at a time when summer demand should be bringing inventories down. The Organization of Petroleum Exporting Countries and its allies have sought to reduce bloated oil stockpiles to the five-year average, but increasing numbers of drilling rigs in America, as well as rising output in Libya, are putting that target in jeopardy.

"We cannot afford to have another build in crude or gasoline," Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York, said by telephone. "The market’s just dying for a reason to buy this thing, but you can’t really do that before" Wednesday’s data on stockpiles.

West Texas Intermediate for July delivery, which expires Tuesday, closed at $44.20 a barrel on the New York Mercantile Exchange, down 54 cents. Futures have fallen 18 percent this year.

Brent for August settlement fell 46 cents to settle at $46.91 a barrel on the London-based ICE Futures Europe exchange, after dropping 1.6 percent last week. The global benchmark crude traded at a premium of $2.48 to August WTI.

U.S. drillers increased the rig count by six to 747 last week, the highest level since April 2015, according to Baker Hughes. American crude production has expanded to 9.33 million barrels a day, Energy Information Administration data show.

“The number of oil rigs continued to rise last week and the market needs to see at what oil price will we not have further rig activation in the U.S.,” said Bjarne Schieldrop, chief commodities analyst at SEB AB in Oslo. “There seems to be very low conviction in the market that there really will be any inventory drawdown in the second half of the year.”

Libya’s oil production has risen to about 900,000 barrels a day after some fields restarted and the country’s biggest deposit, Sharara, increased output, according to a person with knowledge of the matter. Libya, exempt from the OPEC deal, plans to boost output to the highest since 2013 by the end of July.

Oil-Market News:

-- Demand will rise during the third quarter and supply cuts need more time to have an impact on the market, United Arab Emirates Energy Minister Suhail Mohammed Al Mazrouei said in Dubai. Saudi Energy Minister Khalid Al-Falih made a similar comment in Saudi newspaper Asharq al-Awsat.
-- OPEC will need to maintain its current supply quota through 2018 to prevent an increase in inventories, unless rig counts decline substantially, Morgan Stanley analysts wrote in a report.
-- There’s significant downside to U.S. oil-supply projections for 2017 and next year if prices remain at about $45 a barrel, according to industry consultants FGE.

Article Link To Bloomberg:

Amazon CEO Jeff Bezos May Be Single-Handedly Killing Inflation

-- The Amazon-Whole Foods deal could push down grocery prices and hamper the Fed's hopes for higher inflation.
-- Economists believe the deal will have to trigger a chain reaction through the industry to have a broader impact.

By Jeff Cox
June 20, 2017

Amazon CEO Jeff Bezos has changed the way the retail world operates. He may be about to exert a similar level of pressure on the economy and expectations for future price trends at the supermarket.

At a time when central banks are starting to gird against an expected rise in inflation ahead, Bezos' move to acquire Whole Foods looks to be a significant counterweight.

Analysts expect Amazon to rein in the famously high prices of the upscale grocery chain — "Whole Paycheck," as it is often called — which then could have a ripple effect through the industry.

"Now Amazon is going to reshape the entire food retailing industry and it is highly deflationary — and this is an $800 billion grocery market we're talking about," David Rosenberg, senior economist and strategist at Gluskin Sheff, said in his daily note Monday.

Rosenberg sees "a supermarket war of historic proportions" that will have a significant effect on an industry "that had already been confronted with escalating competitive pressures from the Web as well as foreign entrants."

While some economists disagree that the merger's ramifications will be that dire, it certainly raises questions about how truly disruptive Amazon can be. Should the move put pressure on other chains, Wal-Mart and Target in particular, to lower their prices, it's hard to say where it all could end.

If nothing else, it certainly adds a new wrinkle to the policy debate faced by the Fed and Washington lawmakers.

"We doubt it means much for commodities in the near term, but underscores the changing landscape for how consumers purchase food," David Maloni, president of the American Restaurant Association, said in a note. "Of course, we don't know Jeff Bezos' plans here, but it's highly likely he sees something in food sales that can be disrupted on a massive scale. We live in remarkable times, for sure."

This particular time is seeing the biggest marriage yet between the retail online and brick-and-mortar models.

Bezos already has broken through the barrier somewhat with pop-up stores and its Seattle bookstore. An active partnership with Whole Foods knocks down that wall completely and already is being touted as a new day for the industry.

However, the immediate implications could be less far-reaching.

Food makes up about 14.6 percent of the consumer price index, a widely used inflation gauge. That's significant, but only about one-third the weight of housing and a shade less than transportation.

For the Amazon-Whole Foods merger to have a true deflationary impact, it would have to set off a chain reaction through the industry, where the other big grocers start knocking back prices to keep up. It's a trend not hard to envision given the influence Amazon has on broader retail pricing, but the timing becomes the question.

"With respect to the Amazon-Whole Foods merger, I think it's premature to anticipate a deflationary surge via grocery prices based on Amazon's ability to ship units of goods to customers," Joe Brusuelas, chief economist at RSM, a middle-market consulting firm, said in an interview. "This is a foray into a highly volatile industry, based on commodity prices, which are immune to Amazon's ability to shape a supply chain."

The Fed's Dilemma

That willingness to believe that Amazon by itself cannot spark deflation will be central to the Fed's thinking ahead. Central bank officials have indicated that while inflation readings have been soft this year, the trend will bring the level back to the Fed's 2 percent target next year and justify its current intent to tighten monetary policy.

However, that belief is coming under heavy challenge in financial markets.

"The Fed seems to have a normalization fetish," Bill Miller, the legendary investor and head of the Miller Opportunity Fund, told CNBC's "Closing Bell" on Friday. Miller said he'd rather see the Fed let inflation run high considering the low threat of overheating that current conditions pose.

"The risk is actually asymmetric," added his son, Bill Miller IV. "It's a way bigger risk to go into a deflationary environment than to let the economy run a little hot."

The Fed, though, takes a more nuanced view of inflation than whether a big corporate merger might put downward pressure on prices.

In fact, policymakers tend to be dismissive of the vagaries of food and energy prices, contending they tend to be volatile and their effects transitory, and instead focus on so-called core inflation, which doesn't even take into account the two categories.

That's why the Fed likely will need other signals before it starts tapping the brakes on its current policy course.

"We need to be more realistic about how much impact [the merger] could have on food price inflation in the near future," said Jeremy Lawson, chief economist at Standard Life Investments. "It's something to monitor and be observant about, but not something that will affect the near-term forecast for inflation."

Article Link To CNBC:

Don’t Raise The Debt Limit -- Repeal It

Owing tens of trillions is a problem. Default would be a catastrophe. End the continuing crisis.

By Jason Furman and Rohit Kumar
The Wall Street Journal
June 20, 2017

Over the past eight years, high-stakes negotiations in Congress over the federal debt limit have repeatedly brought Washington to the verge of default. We were on opposite sides of these debates, as senior policy advisers to President Obama and Senate Republican Leader Mitch McConnell, and we continue to disagree about taxes and the proper size of government. Yet we both believe that the statutory debt limit has outlived its usefulness as a mechanism for restraining the size of the national debt. Or, put more precisely, we think that whatever residual value the debt limit may have is far outweighed by the risk that a potential U.S. default poses to the global economic order.

Now the debate is heating up again: The Treasury Department is already taking “extraordinary measures” to avoid going above the debt ceiling, but that can last only a matter of months. Congress will have to act. But this time instead of merely raising the debt limit, lawmakers should abolish it altogether—for the good of President Trump, all his successors and the American people.

The Constitution assigns Congress the power to tax and spend, which determines the annual budget deficit and, therefore, the debt. Separately, the Constitution authorizes Congress to “borrow Money on the credit of the United States.” But what if lawmakers approve spending, and then later refuse to borrow the money needed to satisfy the obligation? The result would be a default: Washington either would stop paying bondholders or would fall short on its other commitments—for example, to disabled veterans or defense contractors or even taxpayers who are owed refunds.

Fortunately, this has never happened. Congress has always met its responsibility to authorize the borrowing needed to pay America’s bills. Over the past several decades, however, lawmakers have made an increasingly regular practice of using the debt limit as leverage, flirting with default as a way to get concessions from the other side.

Until World War I, Congress authorized debt on a case-by-case basis, approving individual bond issues or allowing borrowing for a specific purpose. In 1917, in an effort to make the process more efficient, Congress granted the Treasury the authority to borrow up to a certain limit.

For decades, this system worked effectively. But skirmishes over the debt limit began as early as 1953, when President Eisenhower asked lawmakers to raise the figure. Sen. Harry F. Byrd Sr. , a Democrat from Virginia, led the upper chamber’s Finance Committee to reject the president’s request. Then in 1967 the House, controlled by Democrats, rejected in a floor vote a debt-ceiling increase requested by President Lyndon Johnson.

The challenge of raising the debt limit became even more difficult over the following decades. In 1985 Treasury Secretary James Baker became the first to use “extraordinary measures” to prevent borrowing from hitting the cap. An expanding set of such measures were deployed in 1995-96, 2002, 2003, 2011, 2013, 2014, 2015 and 2017. Now that these measures are used almost annually, it is hard to justify calling them “extraordinary.”

Although the measures mostly involve inconsequential reshuffling in the federal ledger, they can have real-world costs. For example, Treasury Secretary Steven Mnuchin, like several of his predecessors, has suspended the sale of state and local government series bonds. This allows the Treasury to stay below the debt ceiling for longer but can make it more costly for states and cities to manage their finances.

As the debt limit nears, costs mount. In the past, the Treasury has operated with a smaller cash cushion against unforeseen contingencies, has rejiggered bond maturities in ways that interfere with liquidity in the financial system, and has paid higher yields to borrowers worried about timely repayment. At the same time, brinkmanship over the debt limit erodes consumer and business confidence and increases market volatility.

Note that these costs are incurred simply by approaching the debt limit without actually reaching it. In a 1985 letter, President Reagan discussed what would happen if the government did someday teeter over the edge: “The full consequences of a default—or even the serious prospect of default—by the United States are impossible to predict and awesome to contemplate.” During the debt negotiations of 2011, President Obama similarly warned that hitting the limit “would risk sparking a deep economic crisis—this one caused almost entirely by Washington.”

While many countries have limits on the policies that drive debts and deficits, none of them have a history of using the threat of default as a negotiating tool once spending and taxing decisions have been made. Denmark is the only other country with a debt limit on the books, but it is set so high as to be irrelevant.

To meet the obligations set out by Congress, the U.S. will have to raise the debt limit by about $3 trillion over the next four years—and another projected $1 trillion, give or take, each year thereafter. At this pace, the risk is high that negotiations to raise the debt ceiling may fail, with unimaginably severe consequences.

Lawmakers are right to be concerned about steep increases in the debt. But those worries should be expressed when the policies that actually increase the debt are voted on. Once new policies become law, defaulting on interest payments or veterans’ benefits is hardly productive. A new mechanism is necessary to tackle the debt issue—and it must be one that does not prejudge the question of revenue increases versus spending cuts, which is for future Congresses to resolve.

For now, the right move is to eliminate the debt limit permanently. That would let the Treasury focus on the most efficient and effective ways to manage the federal government’s cash flow, giving future presidents, both Democratic and Republican, a freer hand. No matter which party holds the White House, all Americans would benefit from taking the threat of a U.S. default off the table.

Article Link To The WSJ:

Three Years On, Oil Industry Comes To Terms With Cheap Crude

Companies drive down costs, scale back projects and tackle spendthrift culture; ‘lower for longer’ is the new mantra.

By Georgi Kantchev, Sarah Kent and Erin Ailworth
The Wall Street Journal
June 20, 2017

Three years after the price of crude began its rapid descent, the oil industry and investors are finally resigned to the idea of lower prices for longer, potentially ending a period of crisis for the sector.

The price of Brent crude, the international benchmark, is down 59% since it hit a closing high of $115.06 a barrel three years ago on Monday. West Texas Intermediate, the U.S. gauge, also is 59% lower than the $107.26 high it hit a day later.

The steep fall sparked a slump in oil company profits, recessions from Russia to Venezuela, and huge job cuts across the world’s oil fields.

But now, petrostates, investors and major oil companies are adapting to a world in which they see a range of $50 to $60 a barrel as the new equilibrium. The industry has had little choice but to accept the new reality after the Organization of the Petroleum Exporting Countries and other big producers failed to lift oil prices by capping their production, most recently at a meeting in late May.

Producers have cut costs, focused on more-profitable assets and no longer throw money at costly projects in places like the Arctic. Their ability to profit at lower oil prices has helped steady investors’ nerves, and they are starting to fund new projects again, though a debate is still raging over the prospect of a supply crunch down the line.

“Lower for longer has become the new mantra in the industry,” said Daniel Yergin, vice chairman of IHS Markit and a longtime oil-market watcher. “People are re-gearing themselves to a new price level and $50 to $60 seems acceptable to most.”

To be sure, this new range is far from comfortable for some countries and companies, particularly in the services sector, which continue to struggle. Venezuela and its oil-fueled economy have collapsed, and others, like Iraq, are still facing economic challenges.

On Monday, oil prices edged lower, with Brent down 1%, to $46.91 a barrel, and U.S. crude off 1.2%, to $44.20.

But for others the new level is a relief after a combination of booming U.S. shale output and Saudi Arabia’s continued pumping sank crude to decade-low levels of under $30 early last year.

Those U.S. drillers have led the way in adapting to the lower price. Before the bust, producers often needed oil at $80 to $85 a barrel to break even.

Shale producers operating in a number of fields can break even at $50 to $60 oil today, according to oil-and-gas data firm Rystad Energy. There are a handful of companies that have learned to make money on wells at $40 oil.

When the oil price began to fall, Bryan Sheffield, chief executive of Parsley Energy Inc. doubted his Austin, Texas-based company would pull through.

“In year one, I wasn’t sure we were going to survive. We went from $17 to $11 in like three days,” he said of a decline in share price at one point in 2014.

Since the start of 2015, in the U.S., 105 producers and 120 oil-field-service companies have filed for bankruptcy, according to Haynes & Boone LLP. In a calmer environment, there might be one or two bankruptcies of note among oil and gas producers a year and a few more among smaller services companies.

U.S. shale drillers persevered by focusing on their best acreage and making technological improvements, such as drilling supersize wells with more sand to gain savings via economies of scale.

Parsley repeatedly sold shares to raise cash, bolstering its balance sheet and allowing it to make acquisitions in the Permian Basin, a drilling field in West Texas that has become one of the most economic places in the U.S. to operate, where producers can make money on wells even at low oil prices.

Now, Mr. Sheffield said Parsley can continue to expand even if oil drops down to $40 a barrel.

Big oil, too, is settling in for an extended period of cheap crude.

Chevron Corp. , Royal Dutch Shell PLC, Exxon Mobil Corp. and BP PLC have all indicated they will be able to generate enough cash at $60 a barrel to cover spending and shareholder payouts this year, a major focus for investors worried about the safety of dividends. At $50 a barrel, the picture is more mixed. But the companies say they are focused on living within their means at even this price.

In the first quarter of 2017, many big oil companies posted their highest profit in over a year, and investments are picking up again as cost-cutting efforts begin to pay off.

BP spent most of this decade retrenching in the wake of its fatal blowout in the Gulf of Mexico in 2010 and as the oil price skidded lower, but despite weaker crude prices the U.K.-based company is now preparing for a period of strong growth. It is planning to add 800,000 barrels a day of new production by 2020. Last week, BP said it plans to spend $6 billion with partner Reliance Industries Ltd. to develop gas projects offshore India.

“Across the business we are firing on all cylinders,” BP Chief Executive Bob Dudley told investors at the company’s annual meeting last month.

Others are also stepping up activity. On Friday, Exxon and its partners announced a $4.4 billion project to develop one of the largest oil finds in the last decade off the coast of Guyana.

Shares in Shell and Exxon are trading at or just below the levels of much of 2011 to 2014, when oil prices were consistently over $100 a barrel, showing that investors, too, believe big oil companies can handle the lower prices. Companies have driven down costs by squeezing suppliers and contractors, trimmed less profitable projects and tackled a once spendthrift culture.

This is all a big change from just three years ago.

In 2013, Saudi Arabia’s then oil minister, Ali al-Naimi, declared $100 a barrel a “reasonable price” for consumers and producers. Now, many people in the oil industry don’t even want to see that price again, some analysts say. That is because high oil prices triggered a big investment boom that fueled a global supply glut and crashed the market.

In Iraq, the once-booming oil town of Basra is now dotted with half-finished construction projects and motorways that go nowhere, stalled as the oil price plummeted. In Peace River, Alberta, Canada, the promise of a $2 billion new Shell oil facility was expected to double the population of the town. The project never happened.

Cheap oil also helps the economies of major consumers such as the U.S. and Europe. U.S. motorists had logged a record number of miles in the year till March, according to the Federal Reserve Bank of St. Louis.

“For oil, $50 to $60 is a sweet spot both for consumers and for producers,” said Rob Thummel, who manages energy assets for Tortoise Capital Advisors.

While prices are trading below that level—in part because of drillers’ success in adapting—it is a range that has persisted for much of this year and that analysts expect to last.

Over the past year, analysts have steadily downgraded their expectations for oil prices. In The Wall Street Journal’s May survey, analysts predicted Brent would average $59 a barrel next year, down from $68 in the survey a year earlier. For 2019, the analysts now see Brent at $60 a barrel, down from a prediction of $76 last May.

The adaptability of shale producers is key. As the price heads higher, they can open up the taps, sending oil back down and ensuring a range-bound price.

The oil industry may also be wrong and prices may still fall. A slowdown in China, the world’s second-biggest oil consumer, could hit demand. On the supply side, OPEC and other producers could abandon their agreement to cap output.

But the oil industry is feeling better about itself. At this year’s big gathering, Houston’s CERAWeek conference, the mood was palpably lighter, said BP’s Mr. Dudley. “I don’t think I heard anyone laugh last year at anything,” he said.

“It feels like we’re heading into a balance point here,” he said.

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Tesla Said Close To Agreeing On Plan For China Production

Local plant would allow automaker to bypass 25% import tariff; Tesla’s China revenue tripled to more than $1 billion in 2016.

Bloomberg News
June 20, 2017

Tesla Inc. is close to an agreement to produce vehicles in China for the first time, giving the electric-car maker better access to the world’s largest auto market, according to people familiar with the matter.

The agreement with the city of Shanghai would allow Tesla to build facilities in its Lingang development zone and could come as soon as this week, said the people, who asked not to be identified because the negotiations are private. Details are being finalized and the timing of the announcement could change. Tesla would need to set up a joint venture with at least one local partner under existing rules and it isn’t immediately clear who that would be.

Representatives for Tesla at the company’s headquarters in Palo Alto, California, didn’t immediately respond to requests for comment. A spokesman for Lingang didn’t answer calls to his mobile phone.

Setting up local production is key for Chief Executive Officer Elon Musk to continue growing in China, where Tesla’s revenue tripled to more than $1 billion last year. Assembling vehicles locally would allow the company to avoid a 25 percent tax that renders Model S sedans and Model X sport utility vehicles more expensive than in the U.S.

China has identified new-energy vehicles as a strategic emerging industry and aims to boost annual sales of plug-in hybrids and fully electric cars 10-fold in the next decade. Government support helped China surpass the U.S. in 2015 to become the world’s biggest market for the non-emission autos.

Tesla’s shares rose about 2 percent in after-hours U.S. trading. The stock has gained 73 percent this year. Shanghai Lingang Holdings Co., a state-owned industrial zone developer and landlord, climbed as much as 8.7 percent to a seven-month intraday high. Calls to the company’s investor relations office weren’t answered.

Bringing down the costs of electric cars is crucial to Musk’s ambitions to reach more mass market consumers. Next month, Tesla is slated to begin rolling out the Model 3, a more affordable and smaller electric sedan. Tesla has yet to launch the Model 3 in China. In the U.S., consumers stood in long lines to place $1,000 deposits for the vehicle.

In March, Tencent Holdings Ltd., China’s biggest internet company, bought a 5 percent stake in Tesla for $1.8 billion. Teaming up with the owner of the WeChat and QQ messaging services could help the automaker gain traction in a market where more than 200 companies have announced plans to build new-energy vehicles.

Tesla, which made roughly 80,000 cars in 2016 and aims to boost it by about 7-fold to 500,000 annually by 2018. The automaker also plans to finalize locations of up to three battery Gigafactories this year.

Tesla purchased its only vehicle assembly plant in Fremont, California, from Toyota Motor Corp. in 2010 for just $42 million. The company has estimated the cost of its battery gigafactory near Reno, Nevada, may eventually reach about $5 billion.

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