Thursday, June 22, 2017

Thursday, June 22, Morning Global Market Roundup: Asian Stocks Rise, Oil Languishes Near 10-Month Low

By Nichola Saminather
June 22, 2017

Asian stocks advanced on Thursday, but oil futures hovered near a 10-month low hit overnight on concerns over a supply glut and falling demand.

European stocks were mixed with financial spreadbetter CMC Markets expecting Britain's FTSE 100 .FTSE to open up 0.1 percent, Germany's DAX .GDAXI to be little changed and France's CAC 40 .FCHI to start the day down 0.1 percent. All three closed in negative territory on Wednesday.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS climbed 0.7 percent.

Japan's Nikkei .N225 rose almost 0.1 percent. Shares in auto air bag-maker Takata Corp plunged 50 percent as they exchanged hands for the first time since sources said last week it was preparing to file for bankruptcy.

South Korea's KOSPI .KS11 added 0.3 percent, while Australian shares jumped 1 percent. Taiwan shares .TWII hit a 27-year high.

Chinese shares added to gains made on Wednesday after MSCI included mainland shares in its emerging market indexes. The blue-chip index .CSI300 rose 1.3 percent. Hong Kong's Hang Seng .HSI climbed 0.5 percent.

Crude oil was subdued as investors' doubts that OPEC-led output cuts would dent a three-year glut offset data showing a drop in U.S. inventories.

"The time for contrarian trades in oil is fast approaching, but I would want to see some stability in price and the technicals start to become more convincing," said Chris Weston, chief market strategist at IG in Melbourne.

U.S. crude futures CLc1 slipped almost 0.1 percent, or 3 cents, to $42.50 a barrel. They closed down 1.6 percent on Wednesday after touching their lowest level since August.

Global benchmark Brent LCOc1 lost 0.1 percent, or 5 cents, to $44.77. It closed down 2.6 percent on Wednesday after touching a seven-month low.

The resulting decline in oil shares hit Wall Street overnight.

The Dow Jones Industrial Average .DJI closed down 0.3 percent, while the S&P 500 .SPX was slightly lower. Nasdaq .IXIC bucked the trend to end up 0.7 percent, lifted by biotech stocks.

Financial stocks also contributed to losses on Wall Street, driven lower by a drop in the Treasury yield curve to its flattest in almost a decade, as investors tried to reconcile a hawkish Federal Reserve with deteriorating inflation measures.

Boston Fed President Eric Rosengren and Fed Vice Chair Stanley Fischer suggested they are concerned less about raising rates too fast or too high than about keeping them too low for too long.

The yield curve between five-year notes and 30-year bonds US5US30=TWEB flattened to 95 basis points, the narrowest since December 2007, on Thursday.

The dollar eased, falling 0.2 percent to 111.145 yen JPY=D4.

The dollar index .DXY was about 0.1 percent lower at 97.487, extending Wednesday's 0.2 percent loss.

The New Zealand dollar NZD= gained 0.5 percent to $0.7257 after the central bank left its interest rate unchanged at a record low as expected and reiterated it would remain steady for a while.

Sterling GBP=D3 was steady at $1.2674, holding Wednesday's 0.3 percent gain on comments by the Bank of England's chief economist that he was likely to vote for an interest rate hike this year. Until now, he has been seen as largely supportive of keeping rates low.

The euro EUR=EBS was flat at $1.117, after Wednesday's 0.3 percent gain.

The weaker dollar lifted spot gold XAU= 0.5 percent to $1,252.80 an ounce.

Article Link To Reuters:

Oil Prices Climb Off 10-Month Lows As U.S. Stockpiles Drop

By Aaron Sheldrick
June 22, 2017

Oil prices rose on Thursday after U.S. crude and gasoline stockpiles fell, but worries over whether OPEC-led output cuts would be able to rein in a three-year glut continued to drag.

The market largely shrugged off comments overnight from Iran's oil minister that members of the Organization of Petroleum Exporting Countries (OPEC) are considering deeper cuts in production.

Brent crude futures were 4 cents higher at $44.86 a barrel, after falling 2.6 percent in the previous session to their lowest since August last year.

U.S. crude futures were up 6 cents at $42.59 a barrel. On Wednesday, they settled down at $42.53, after touching their lowest intraday level since August 2016.

Since peaking in late February, crude has dropped around 20 percent, with only brief rallies, completely erasing gains at the end of the year in the wake of the initial OPEC-led production cut.

OPEC and other producers agreed to cut output by 1.8 million barrels per day from January for six months, subsequently extended for a further nine months.

With production rising in Nigeria and Libya, countries exempt from the deal, and output surging in the United States, which was not part of the agreement, many bulls appear to have thrown in the towel.

Oil has "now fallen into 'bear' territory," ANZ said in a research note. "OPEC (and allies) may have pared back production, but that's being offset by relentless drilling in the U.S. and more output in Libya."

A bigger-than-expected cut in U.S. crude stockpiles reported overnight is barely shifting the dial.

Crude inventories fell 2.5 million barrels in the week to June 16, surpassing analyst expectations for a decrease of 2.1 million barrels, as imports rose marginally by 56,000 barrels per day, the U.S. Energy Information Administration said on Wednesday.

Gasoline stocks fell 578,000 barrels, compared with analyst expectations for a seasonally unusual 443,000-barrel gain, which had been seen as bearish in the market.

Stocks of the motor fuel had also risen unexpectedly by 2.1 million barrels in the previous week, despite the start of the summer driving season.

Article Link To Reuters:

ISIS Blows Up Historic Mosul Mosque Where It Declared 'Caliphate'

By Marius Bosch and Maher Chmaytelli
June 22, 2017

Islamic State militants on Wednesday blew up the Grand al-Nuri Mosque of Mosul and its famous leaning minaret, Iraq's military said in a statement, as Iraqi forces seeking to expel the group from the city closed in on the site.

It was from this medieval mosque three years ago that the militants' leader Abu Bakr al-Baghdadi declared a self-styled "caliphate" spanning parts of Syria and Iraq.

''Blowing up the al-Hadba minaret and the al-Nuri mosque amounts to an official acknowledgement of defeat,'' Iraqi Prime Minister said in a brief comment on his website.

The Iraqis called the 150-foot (45-metre) leaning minaret Al-Hadba, or "the hunchback." Baghdadi's black flag had flown over it since June 2014.

Islamic State's Amaq news agency accused American aircraft of destroying the mosque, a claim swiftly denied by the U.S.-led coalition fighting the militant group.

"We did not strike in that area," coalition spokesman U.S. Air Force Colonel John Dorrian told Reuters by telephone.

"The responsibility of this devastation is laid firmly at the doorstep of ISIS," U.S. Army Major General Joseph Martin, commander of the coalition's ground component, said in a statement, using an acronym for Islamic State.

The media office for Iraq's military distributed a picture taken from the air that appeared to show the mosque and minaret largely flattened and reduced to rubble among the small houses of the Old City, the historic district where the militants are under siege.

A video seen on social media showed the minaret collapsing vertically in a belch of sand and dust, as a woman lamented in the background, "The minaret, the minaret, the minaret."

The mosque was destroyed as Iraq's elite Counter Terrorism Service (CTS) units, which have been battling their way through Mosul's Old City, got within 50 meters (164 feet) of it, according to an Iraqi military statement.

An Iraqi military spokesman gave the timing of the explosion as 9:35 p.m (1835 GMT).

"This is a crime against the people of Mosul and all of Iraq, and is an example of why this brutal organization must be annihilated," said U.S. Major General Martin.

Iraqi forces said earlier on Wednesday that they had started a push toward the mosque.

''This will not prevent us from removing them, no, killing them not removing them, inside the Old City,'' Lieutenant General Abdul Ghani al-Assadi, senior CTS commander in Mosul, said in a video posted over a messaging app.

The forces on Tuesday had encircled the jihadist group's stronghold in the Old City, the last district under Islamic State control in Mosul.

Baghdadi proclaimed himself "caliph," or ruler of all Muslims, from the mosque's pulpit on July 4, 2014, after the insurgents overran vast swathes of Iraq and Syria.

Baghdadi's speech from the mosque was the first time he revealed himself to the world, and the footage broadcast then is to this day the only video recording of him as "caliph."

Minaret Was Vulnerable 

Iraqi officials had privately expressed hope that the mosque could be retaken in time for Eid al-Fitr, the festival marking the end of Ramadan, the Muslim month of fasting. The first day of the Eid falls this year on June 25 or 26 in Iraq.

"The battle for the liberation of Mosul is not yet complete, and we remain focused on supporting the Iraqi Security Forces with that objective in mind," said Martin.

The fall of Mosul would, in effect, mark the end of the Iraqi half of the "caliphate," even though Islamic State would still control territory west and south of the city, the largest over which they held sway in both Iraq and Syria.

Baghdadi has left the fighting in Mosul to local commanders and is believed to be hiding in the border area between Iraq and Syria, according to U.S. and Iraqi military sources.

The mosque was named after Nuruddin al‑Zanki, a noble who fought the early crusaders from a fiefdom that covered territory in modern-day Turkey, Syria and Iraq. It was built in 1172-73, shortly before his death, and housed an Islamic school.

By the time renowned medieval traveler and scholar Ibn Battuta visited two centuries later, the minaret was leaning. The tilt gave the landmark its popular name: the hunchback.

It was built with seven bands of decorative brickwork in complex geometric patterns also found in Persia and Central Asia.

Nabeel Nouriddin, a historian and archaeologist specialising in Mosul and its Nineveh region, said the minaret had not been renovated since 1970, making it particularly vulnerable to blasts even if it was not directly hit.

The Mosque's destruction occurred during the holiest period of the Islamic holy month of Ramadan, its final 10 days. The night of Laylat al-Qadr falls during this period, marking when Muslims believe the Quran was revealed to prophet Mohammed.

Islamic State fighters have destroyed many Muslim religious sites, churches and shrines, as well as ancient Assyrian and Roman-era sites in Iraq and in Syria.

The group posted videos online in 2015 showing the destruction of artifacts in the Mosul museum, some of which dated from the 7th century BC. It is also suspected of selling artifacts.

Article Link To Reuters:

For Thousands Of U.S. Auto Workers, Downturn Is Already Here

By Nick Carey
June 22, 2017

Wall Street is fretting that the U.S. auto industry is heading for a downturn, but for thousands of workers at General Motors Co factories in the United States, the hard times are already here.

Matt Streb, 36, was one of 1,200 workers laid off on Jan. 20 - inauguration day for Republican U.S. President Donald Trump - when GM canceled the third shift at its Lordstown small-car factory here. Sales of the Chevrolet Cruze sedan, the only vehicle the plant makes, have nosedived as U.S. consumers switch to SUVs and pickup trucks.

Streb is looking for another job, but employers are wary because they assume he will quit whenever GM calls him back.

"I get it," said Streb, who has a degree in communications, "but it's frustrating."

Layoffs at Lordstown and other auto plants point to a broader challenge for the economy in Midwestern manufacturing states and for the Trump administration.

The U.S. auto industry's boom from 2010 through last year was a major driver for manufacturing job creation. The fading of that boom threatens prospects for U.S. industrial output and job creation that were central to President Trump's victory in Ohio and other manufacturing states.

"This is about economics, not what Trump says," said Robert Morales, president of United Auto Workers (UAW) union Local 1714, which represents workers at GM's stamping plant at Lordstown. "Even if Trump went out and bought 10,000 Cruzes a month, he wouldn't get the third shift back here."

Last week the Federal Reserve said U.S. factory output fell 0.4 percent in May, the second decline in three months, due partly to a 2-percent drop in motor vehicles and parts production.

Mark Muro, a senior fellow at the Brookings Institution, has compiled data from government sources that show the auto industry punching higher than its weight in job creation in recent years - accounting for between 60 percent and 80 percent of all U.S. manufacturing jobs added in 2015 and 2016.

In the first quarter of this year, the auto industry accounted for less than 2 percent of the 45,000 manufacturing jobs created.

"There's no argument with the idea that auto has been pulling the manufacturing sled up the mountain for the last three or four years," Muro said. "If you take auto out, you’re left with a very tepid outlook indeed."

Long-term auto layoffs could threaten the economies of communities and states directly affected, although after decades of boom and bust, many communities in the auto manufacturing heartland have diversified.

In Ohio's Mahoning Valley, which was battered by the collapse of the once-dominant steel industry, the boom in drilling for shale gas helps offset job cuts at auto plants.

Lordstown Mayor Arno Hill says the town salted away money during the boom to pay down its debts and new businesses are coming in, including a $900-million power plant being built in town that will burn cheap natural gas produced in the region.

GM makes up 40 percent of tax receipts versus 85 percent in the early 1990s, he said.

"GM is still the brightest star in the Mahoning Valley, but luckily we have diversified our economy," Hill said. "There is pain for the laid-off workers, but it won't hurt us as bad it used to."

Lordstown's workers have taken steps to blunt the impact of layoffs, with help from GM.

Matt Streb's wife is due to start work soon after getting a degree, while he hopes to return to a former job as a mailman. In the meantime, GM gave advance notice of job cuts so he saved extra money and has drastically cut his spending.

"The auto industry is cyclical and has always had its ups and downs," Streb said. "This is just another Lordstown downturn."

Stalling Sedan Sales

The decline in U.S. auto sales is still minor compared to the dramatic collapse during the 2007-2009 financial crisis, when demand for new vehicles plunged to its lowest levels in decades.

However, the days when auto assembly and parts plants throughout the Midwest were running flat-out because of high demand for nearly every type of vehicle are over. Recent sales trends show consumers becoming more selective, shunning older models and especially smaller cars.

For much of the boom that ran from 2010 through to a record year in 2016 of 17.55 million new vehicles sold, the share of cars has declined versus "light trucks" - or pickup trucks, SUVs and crossovers.

After peaking at 51.32 percent of all sales in 2012, passenger cars fell to 40.4 percent of sales in 2016. That decline equates to the output of seven or eight vehicle assembly plants.

Through the first five months of this year, sedan sales fell 11 percent, even as the light truck category rose 4.7 percent.

To avoid profit-sapping discounts, and reverse a decline in prices of used vehicles, automakers are ordering more and deeper production cuts.

GM has laid off more than 5,000 workers so far this year - including 1,000 at its Fairfax plant in Kansas that makes the Chevrolet Malibu midsize sedan. GM has also laid off 1,100 workers at a plant in Lansing because it has ended production of the GMC Acadia SUV there.

More GM workers will be hit with temporary layoffs this summer. Lordstown will shut up shop for five weeks this summer, much longer than the usual two-week summer vacation closure.

Many laid-off GM workers are finding temporary employment at other facilities or taking permanent transfers to plants like its Arlington, Texas, facility where production of large sport utility vehicles continues unabated. However, those temporary postings require workers to relocate hundreds of miles from home.

Randy Freeman, president of UAW Local 652 which represents workers at GM's Grand River plant in Lansing, Michigan, which makes sedans, says he has been pleased by GM's efforts to rehire workers and relations with the automaker "are on an upward swing."

The threats to U.S. workers building sedans are not likely to ease, barring a spike in the price of gasoline. Ford Motor Co signaled its long-term pessimism about small-car demand in the United States by announcing plans on Tuesday to shift production of its Focus compact car model to China. The Michigan plant that builds the Focus currently is expected to switch to building trucks and SUVs in 2018.

At GM's Lordstown and Lansing Grand River plants, UAW representatives say they are focused on improving quality in the hope that GM will pick their plant when it's time to find a location for producing a new truck or SUV.

At Lordstown, for instance, union officials tout the fact the plant has just won a quality award for local innovation on a part that helps the Cruz run better.

"We're working hard to make the best product we can," said Glenn Johnson, president of UAW Local 1112 at Lordstown, "so we can raise our hands and say to GM 'look at what we can do."

Article Link To Reuters:

Trump’s Net Worth Slips To $2.9 Billion As Towers Underperform

Three New York buildings aren’t hitting appraisal targets; Revenue at resorts and golf courses up 3% as debt shrinks.

By Caleb Melby
June 22, 2017

Donald Trump’s office properties aren’t bringing in as much cash as banks that loaned him money had expected.

That’s the biggest finding in an updated assessment of the president’s net worth, which has slipped to $2.9 billion, according to the Bloomberg Billionaires Index, down from $3 billion a year ago. The calculation, five months after Trump’s inauguration, relies on figures compiled from lenders, mortgage documents, annual reports, market data and a new financial disclosure released June 16.

The decrease is driven mostly by a drop in the value of three office properties in Manhattan, where financial data compiled by Trump’s lenders offer a consistent picture: They’re underperforming appraisals conducted when Trump was issued loans. The buildings -- 40 Wall Street, Trump Tower, and 1290 Avenue of the Americas, a tower in which Trump holds a 30 percent stake -- are victims of a changing New York office market, where gleaming new skyscrapers are attracting tenants and demand for space in vintage properties is falling.

The Bloomberg calculation, which previously relied in part on banks’ estimates and appraisals, is now based solely on the three properties’ actual financial results disclosed by managers of mortgage-security trusts that hold Trump debt. The present value of the three properties has been revised down by a combined $380 million.

Allen Weisselberg, chief financial officer of the Trump Organization, and Jeffrey McConney, the company’s controller, didn’t respond to emails detailing Bloomberg’s methodology. An outside spokeswoman didn’t return calls for comment. Hope Hicks, a White House spokeswoman, didn’t respond to emails.

Liquid Assets

The decrease in the value of the three towers was almost offset by successes in other corners of Trump’s empire. His portfolio of liquid assets, including cash, has jumped to $230 million from $170 million following condo sales and other payouts from the Trump International Hotel Las Vegas, as well as the sale of a Manhattan penthouse apartment. He sold most of his stock portfolio last summer, a spokesman said in December.

Trump’s companies received new licensing fees for branded projects in Vancouver and Kolkata, the financial disclosure shows. On an annualized basis, revenue at his 16 golf and resort properties rose 3 percent. Mar-a-Lago, which Trump has visited frequently since the election, saw a 25 percent jump in sales. The properties now have a combined value of $720 million, up from $710 million, according to the index, an increase damped by declining multiples for golf course properties.

At the same time, Trump’s debt load has shrunk to at least $550 million from about $630 million last year, according to lender data and repayment schedules.

Three Towers

The Wall Street building, appraised at $540 million in 2015, had projected annual net operating income of $22.6 million, according to documents shared at the time with potential investors in the property’s debt. It earned $17.4 million in 2016, a year in which it was on a lender watchlist for three months because rental income barely covered debt payments. The property was removed from the list as its situation improved. The index values the property at $400 million based on last year’s performance.

Trump Tower, the president’s home and headquarters before he moved to the White House, is facing a similar problem. Its offices and stores were appraised at $480 million in 2012, with net income estimated at $20.4 million. The property generated $14.1 million of net income last year after higher expenses ate into revenue, lender documents show. The building, including Trump’s penthouse apartment, is now valued at $450 million.

The office tower at 1290 Avenue of the Americas, which Trump owns in partnership with Vornado Realty Trust, also has failed to meet lender expectations. The building was appraised at $2 billion in 2012 on the assumption it would throw off $97.7 million of annual net income. But it generated $77.7 million last year.

“We’re in the biggest development pipeline in Manhattan since the 1980s,” said Keith DeCoster, director of real estate analytics at Savills Studley. “Older buildings -- circa 1980s, 1990s -- are having a tougher time competing.”

Retained Ownership

Trump has retained his ownership interest in his companies. Unlike previous occupants of the Oval Office, he neither divested his assets nor set up a blind trust. Instead, he transferred his holdings to a revocable trust managed by his adult sons, Donald Jr. and Eric, and Weisselberg, the Trump Organization’s CFO.

Trump’s own estimates of his net worth are frequently higher than independent appraisals. When he announced his candidacy in 2015, his campaign released a document stating he had a net worth of $8.7 billion. Later that year, when Bloomberg first assessed his net worth at $3 billion, he described it as “a stupid report.” He later repeatedly asserted he was worth more than $10 billion.

One difference between Trump’s estimates and Bloomberg’s is the value of his personal brand. The 2015 document released by Trump’s campaign said his ability to license his name and likeness to everything from international hotels to mattresses is worth $3.3 billion. Bloomberg assigns it a value of $35 million, or one times sales from ongoing licensing deals. That value hasn’t changed since Trump won the Republican nomination last July.

Article Link To Bloomberg:

How Republican Medicaid Caps Could Hurt Millions

Plans to slow costs may trigger big bills for states and providers while cutting options for the poor.

By John Tozzi
June 22, 2017

Republicans who wrote a health care bill behind closed doors call it a repeal of Obamacare. But the legislation could fundamentally transform another federal health program that provides coverage to far more Americans than the insurance exchanges created by the Affordable Care Act.

It’s called Medicaid.

The GOP plan that the House narrowly passed in May would cap how much the U.S. pays for Medicaid, the public health insurance program for the poor. That’s never happened before. And it's a big deal—more than one-fifth of Americans depend on Medicaid for health care.

Created in 1965, the program covers 72 million people at the bottom of the income ladder. You have to be near poverty to qualify: Depending on the state, single adults can make only $16,000 a year. The limit is about $33,000 for a family of four. Medicaid doesn’t cover middle-class workers during their prime-age years, but many older adults rely on the program to pay for long-term nursing home stays in their final years.

Medicaid has always been an open-ended program, not subject to budget caps. The federal government pays more than half the costs, and states contribute the rest. States negotiate Medicaid payment rates with doctors, hospitals, and nursing homes. The program pays far less than private insurance or Medicare, the government insurance for people over 65. But Medicaid is obligated by law to pay for people who qualify, even if prices rise more quickly than the government anticipates.

Patients could be left on the hook for larger bills, or unable to find doctors willing to take Medicaid

The Republican plan would change that. It would limit Washington’s contribution to state Medicaid programs, based on the number of people enrolled and the price level. How might this work? The details of the Senate bill are still closely held as Republican Majority Leader Mitch McConnell of Kentucky insisted on keeping the details secret.

One of the apparent friction points for his party colleagues is whether Medicaid funding should be pegged to the rate of inflation in the overall economy, or whether it should specifically track medical prices.

Billions of dollars turn on this technical detail. That’s because medical prices started running away from the price of everything else starting about 30 years ago:

The version of the Obamacare repeal passed by the House, the American Health Care Act, would peg federal funding for Medicaid to the rate of medical inflation—the blue line—starting in 2020. That’s the rate at which the cost of health care rises—everything from doctors’ visits and prescription pills to MRIs and giving birth in a hospital. Washington would send states a set amount for each Medicaid enrollee, adjusted each year by that factor.

The House bill would also reverse an expansion of Medicaid eligibility in the Affordable Care Act. The Congressional Budget Office, Congress’ nonpartisan scorekeeper, concluded that under that proposal 14 million Medicaid enrollees would become uninsured in 10 years. It would reduce federal funds for Medicaid by $839 billion in the next decade, the CBO estimates.

The Senate is reportedly considering tying Medicaid funds to overall inflation—the red line in the chart above—starting in 2025. That would mean a far deeper reduction to Medicaid than the House proposal. How that differential would be rectified in conference committee between the two houses is anyone’s guess.

Capping Medicaid isn’t a new idea. Along with Medicare and defense spending, it’s a huge part of U.S. government expenditures. Republicans have sought to limit the program for years. Even Democratic President Bill Clinton floated the idea in the 1990s.

So, perhaps a future with capped Medicaid could be informed by a look backward. Here’s a rough attempt to show possible effects of a cap starting 30 years ago.

In 1987, Medicaid spent an average of about $2,500 per year on each beneficiary. That’s a combination of federal and state funds. In 2015, the comparable number was about $7,900. If per-capita Medicaid spending grew at the same rate as medical prices, it would actually spend more—about $8,700. If it increased only as fast as overall inflation, the number would be $5,300.

Multiply those differences by tens of millions of patients, and you get annual differences of tens of billions of dollars that turn on what Congress is about to do.

For years Medicaid costs grew faster than both medical inflation and broader price levels. But in recent years, Medicaid has increased more slowly than medical prices.

This of course is a thumbnail sketch. The full consequences of such a policy depend on how the caps are enforced, and how states respond. Variation in prices among states and year-to-year changes could make a big difference.

But, as you can see in the charts above, the stakes for Medicaid in just one wonky detail of a sprawling health bill will affect the lives of tens of millions of people in the most personal way. McConnell wants only hours of public debate on this shift in how America cares for its most vulnerable, and a vote in time for July 4 vacation.

If patients’ costs exceed what Medicaid can pay, the money has to come out of somebody’s pocket. Some states might make up the difference, but state budgets are already squeezed by Medicaid costs. Doctors, hospitals, and nursing homes might take the hit, but they already lose money on treating Medicaid patients. Stingier reimbursements might discourage health care providers from accepting Medicaid patients at all.

The results of such a shift by the Republican-controlled Congress? Patients could be left on the hook for larger bills, or unable to find doctors willing to take Medicaid plans. Unable to afford care, the poor or near-poor might forgo care entirely.

Article Link To Bloomberg:

The New Saudi Heir Is A Dangerous Man

Prince Mohammed bin Salman is too inexperienced and too hotheaded for the fraught situation in the Middle East.

By Leonid Bershidsky
The Bloomberg View
June 22, 2017

The abrupt change in Saudi Arabia's line of royal succession will probably help maintain the House of Saud's sway over its 31 million people, 70 percent of which are under 30. It is, however, a dangerous move in the context of a new Big Game unfolding in the Middle East, which involves the U.S. and Russia as well as local players.

King Salman named his 31-year-old son, Mohammed bin Salman, as the new crown prince. This is the second succession reshuffle in which the young heir -- and favorite son of the king -- gained influence. In the last two years, MbS, as the new crown prince is often called, was put in charge of Saudi Arabia's two most important portfolios -- defense and the oil industry. He made the diplomatic rounds last month, visiting President Donald Trump in Washington and President Vladimir Putin in Moscow.

King Salman, 81, clearly seeks a generational change in leadership and perhaps a little less religious fundamentalism. MbS has been working on that, although in the limited way of someone who was trained as a lawyer in Riyad, not in a Western capital. He has, for example, stripped the religious police of the power to arrest people. He's also set up an Entertainment Authority that has been organizing (segregated) concerts and talking about bringing back cinemas; it has even held a comic book convention at which men and women reportedly danced in the same big hall. Top clerics have been up in arms, but presumably, young people like it.

MbS also has a plan to reform the Saudi economy and society, called Vision 2030, which sets specific targets for the percentage of population that will exercise regularly and promises to diversify the country's economy away from oil. Whether it can be done by decree in a country whether two-thirds of the workforce is state-employed remains to be seen, but these are the kinds of reforms that appear both to bring the medieval kingdom closer to the modern world and to prop up the royal dynasty's power.

So far, however, Mohammed bin Salman has been responsible for a more aggressive Saudi stance in regional affairs, to which he has sacrificed the country's previous policy of trying to hold on to oil market share. In 2015, when MbS initiated the Saudi attack on the Houthi rebels in Yemen -- whom Saudi Arabia regards as Iranian proxies -- U.S. support for its anti-ISIS coalition partner was lukewarm. The military operation came as the Saudis were trying to strangle the U.S. shale oil industry by pumping crude at top speed and offering discounts to customers. In that and other ways, the Saudis had made clear they were against President Barack Obama's decision to weaken sanctions against Iran in exchange for promises to curb its nuclear program.

The Yemen operation hasn't gone well. The Houthis are still in control of the capital, Sana'a, peace is nowhere in sight, medical facilities have been destroyed and there's a constant threat of famine. Though the Saudis are still involved, their lack of military success must have shown them the importance of always acting in concert with the U.S.

MbS pushed through a reversal of the oil policy, which has helped U.S. frackers get back on their feet. In combination with other recent moves, such as the grand announcement of a $100 billion deal to purchase U.S. weapons (which may or may not exist in reality), this has helped rebuild relations with the U.S., or rather with the Trump administration and the Iran hawks within it. Without U.S. support, even expressed in Trump's tweets, the Saudi-initiated boycott of Qatar, ostensibly for financing terrorists but in fact for maintaining a relationship with Iran, would have looked like even more of an ill-considered adventure.

The new crown prince is trying to use Trump's backing to mount an attack against perceived Iranian inroads in the Arab world. This policy in and of itself is fraught with the risk of military conflicts, but it is also forcing Putin's hand in aligning Russia to a greater extent with Iran.

Putin has been trying to make nice with all the Middle Eastern players. Putin needs the investment Gulf states can provide for his own top-down plan to wean Russia off its oil dependence. But he also needs the support of Iranian and Iranian-backed ground troops in Syria, where he's trying to avoid putting boots on the ground in his effort to save President Bashar Al-Assad.

Putin's warming relationship with Saudi Arabian royals is more superficial than the ties with Iran. Russia ostensibly is Saudi Arabia's ally in its oil production cuts, though it has mostly supported the verbal interventions, not any meaningful output restrictions. Investment projects are under discussion, though nothing major has materialized yet. Russia is also trying to mediate the Yemen conflict -- something potentially valuable to the Saudis and their allies in the United Arab Emirates, who want out of the dead-end war -- but then, Russia has its own interest in Yemen, where it wants to berth its warships. Put on a scale, none of this outweighs the direct military alliance with Iran in Syria.

The reinvigorated U.S.-Saudi alliance is getting tougher on Assad and on Iran's attempts to project influence. The recent shooting down of a Syrian Air Force plane by U.S. forces is a manifestation of the growing tension, and Russia's vehement reaction to it is predictable escalation. Much as Putin wants to avoid finding himself firmly on Iran's side, a few similar incidents could inexorably push him in that direction.

To keep the volatile situation from blowing up, Saudi Arabia needs a leader who is able to keep a balance between the U.S. and Russia. King Salman and former crown prince Mohammed bin Nayef understood the challenge. Prince Mohammed bin Salman seems to be swinging heavily toward Trump, however, as a way to gain support for his stepped up anti-Iran efforts.

Besides, both the Yemen operation and the oil reversal have been rather unsuccessful, betraying the prince's inexperience. That can be dangerous at the intersection of so many interests. The Middle East needs fewer, not more hotheads if its conflicts are to be defused rather than deepened.

Article Link To The Bloomberg View:

MSCI Forgets Its Doubts About China

What changed from last year? Not much.

By Christopher Balding
The Bloomberg View
June 22, 2017

In the culmination of a long-running saga, MSCI Inc. yesterday announced that it would include some Chinese stocks in its widely used benchmark indexes, starting next year. China has taken this as recognition of its growing economic and financial might. But the decision seemed to have almost nothing to do with the reality of China's financial markets.

For one thing, MSCI seems to be ignoring much of what it said in the past. In yesterday's announcement, it suggested that the recent expansion of a stock-connect program was one development that counted in China's favor. But the big stocks that will be included in the index primarily trade on the Shanghai-Hong Kong Stock Connect, which was launched in 2014. It was up and running when MSCI rejected China for inclusion in the indexes in 2015 and 2016. So it seems like an odd basis for inclusion now.

Likewise, MSCI last year cited the tendency of Chinese companies to halt trading whenever market conditions worsened or bad news came out as a basis for rejection. Yet this year, it evidently had no qualms about roughly 10 percent of A-share companies having voluntarily suspended themselves. Worse, it said that "a two-step inclusion process will be used to account for the existing daily trading limits." In other words, it's creating a special workaround to avoid running afoul of market limits imposed by China's regulators.

Another obstacle cited last year was the ability to sell stock and repatriate funds to investors, which is especially critical for index investors. Given that this year, MSCI gave almost no mention of capital-mobility issues, even as China's crackdown on capital outflows has many companies and investors fretting, it looks like the company was willing to bend its own rules.

Recent history suggests an important lesson here. In September, the International Monetary Fund announced that it would include the yuan in its basket of major international currencies, called the Special Drawing Rights basket. To be included in the SDR basket, a currency is supposed to be widely used, international and freely convertible. At the time, global yuan payments (excluding transactions within China and Hong Kong) were only slightly more than the South African rand and less than the Polish zloty. Further, the offshore yuan was sinking rapidly as China clamped down on capital outflows, the exact opposite of how a free and international currency should behave.

Today, the yuan is sandwiched between the Mexican peso and Danish krone in terms of international transaction volume. Yuan deposits in Hong Kong, the primary offshore center, are down 47 percent from their peak as China's citizens face substantially tightened restrictions. China joined the SDR basket and promptly made its currency significantly less international. Even now, prominent academics wonder whether the yuan should be ejected from the basket altogether.

To its credit, MSCI seems more or less aware of these risks. It even seemed to be distancing itself from its own decision. It opened the announcement by proclaiming "broad support from international institutional investors with whom MSCI consulted." (If there's one thing you can count on, it's investors overlooking risk in search of the next growing market.)

MSCI even acknowledged that effectively every problem it cited last year still exists today. Increases in China's weighting, it said, will require better market accessibility standards, along with "relaxation of daily trading limits, continued progress on trading suspensions, and loosening of … index-linked investment vehicles." These were the very reasons cited for China's rejection last year, and sound more like fond hopes than anything that might happen soon. Nevertheless, MSCI is "hopeful that momentum of positive change" will "continue to accelerate."

China is undeniably an increasingly important market, and higher flows of investment capital will be to its great benefit -- and eventually to the world's. But lowering the standards of what constitutes a market and obfuscating real problems just exposes unknowing foreign investors to elevated risks. If Chinese investors and even regulators are so wary of Chinese stocks, why encourage foreigners to enter the fray?

Article Link To The Bloomberg View:

The Real Reason We’re ‘Drowning In Oil’

Oil prices continue to fall despite OPEC-led output cuts.

By Myra P. Saefong
June 22, 2017

Oil experts tend to blame growing crude production from countries that aren’t bound by the OPEC-led production cut agreement for the ongoing glut in global supplies, but that isn’t the whole story.

Oil producers in the Organization of the Petroleum Exporting Countries continue to “put a lid on their output in an effort to prop up prices,” but the price for a barrel of Brent crude LCOQ7, -0.07% was just below $45 in Wednesday dealings— “comfortably in the $40-$50 price range that I have been expecting for this year,” said Ed Yardeni, president and chief investment strategist at Yardeni Research, in blog post Wednesday.

Brent crude, as well as West Texas Intermediate crude CLQ7, -0.05% has fallen by more than 21% year to date.

Yardeni titled his blog post, “Drowning in Oil” — suggesting that advances in technology have contributed to higher production rates in the U.S. as demand world-wide may increasingly suffer from the use of alternative energy sources like solar.

A report from International Energy Agency released in mid-June showed that global oil supply rose by 585,000 barrels per day in May to 96.69 million barrels a day. That was 1.25 million barrels a day above a year earlier — the highest annual increase since February 2016, the IEA said.

Non-OPEC output, particularly in the U.S., dominated the rise, it said.

In his blog, Yardeni pointed out that despite a plunge in prices, U.S. crude production fell “just” 12% from the week of June 5, 2015, through the week of July 1, 2016, with weekly output better in Texas and North Dakota than the rest of the country.

Since then, it has climbed 10% to 9.3 million barrels a day with oil production, instead, led by the rest of the country, excluding Texas and North Dakota.

“Could it be that frackers figured out how to lower their costs in two states where they’ve been most active, and taken their innovations to other states?” Yardeni asked. “Maybe.”

“The frackers are using every frick in their book to reduce the cost of pumping more crude oil,” he said. “Rather than propping up the price, maybe OPEC should sell as much of their oil as they can at lowest prices to slow down the pace of technological innovation that may eventually put them out of business.”

Meanwhile, major oil producers with large crude reserves such as Saudi Arabia, Russia and Iran, should be “awfully worried that they are sitting on a commodity” that may be much less needed in the figure, said Yardeni.

“As long as the sun will come out tomorrow (as little orphan Annie predicted), solar energy is likely to get increasingly cheaper and fuel a growing fleet of electric passenger cars,” he said.

Article Link To MarketWatch:

Bond Market Flashing Worry On Economy, Countering Fed View

By Karen Brettell
June 22, 2017

The U.S. Treasury yield curve is flashing warning signs on the economy, pointing to a less optimistic prediction for longer-term economic growth at the same time as Federal Reserve officials are adopting a more aggressive tone on raising interest rates.

A flattening yield curve is often interpreted as a negative economic indicator as it shows concerns about the future pace of growth and inflation, because buyers of long-dated debt would demand higher yields if they expected higher costs.

“The Fed’s optimism has no real counterpart in any of the data that we’ve seen so far,” said Aaron Kohli, an interest rate strategist at BMO Capital Markets in New York “The presumption of weak economic growth is fairly firmly rooted and you can see that in the long-end of the curve.“

Dallas Federal Reserve Bank President Robert Kaplan on Tuesday said that the yield curve showed the market expected sluggish growth ahead; however, New York Fed President William Dudley said this week that the flat yield curve reflects low overseas inflation and borrowing costs and not a weakening U.S. economy.

The yield spread between five-year Treasury notes and 30-year Treasury bonds US5US30=TWEB on Wednesday flattened to 95 basis points, the narrowest since December 2007.

The gap between two-year note and 10-year note yields US2US10=TWEB also declined to 80 basis points, just above 10-year lows of 73 basis points reached in mid-2016.

The yield curve reflects the extra interest investors require to buy bonds of a longer maturity. When they demand higher payments for shorter-dated bonds than for longer-dated ones it shows that they are more concerned about nearer-term risks.

The flattening is not yet near an inversion, which is typically seen as a harbinger of a recession.

The curve flattened this week after Fed officials including Dudley and Boston Fed President Eric Rosengren took a more aggressive view to rate hikes, which sent shorter-dated bond yields higher.

That came despite recent data that shows inflation retreating from Fed targets and weakening retail sales and housing data.

Still, there is not widespread alarm of the risk of a recession. Economists at Deutsche Bank said earlier in June that the chances of a U.S. recession in the next 12 months are remote. Jeffrey Gundlach, chief executive officer at DoubleLine Capital, said the flatter curve would start being a concern "when two- and three-year U.S. Treasuries yield about the same."

An economic downturn would be a setback for U.S. President Donald Trump who during his campaign had vowed to lift annual GDP growth to 4 percent, though administration officials now see 3 percent growth as more realistic. First-quarter economic growth disappointed.

Irrespective of economic predictions, investors say demand for high-quality assets is also helping to flatten the U.S. yield curve, as there are few other options that generate returns.

“The market is starved for product and starved for yield and has to be invested. We are still one of the highest-yielding bond markets on the planet,” said Gennadiy Goldberg, an interest rate strategist at TD Securities in New York.

Conditions Still Loose

The flattening yield curve may further loosen financial conditions despite the Fed's attempts to tighten them, giving an additional boost to risk assets like stocks regardless of the strength of the economy.

That's because long-dated debt is heavily influenced by pension funds, hedge funds and other participants that lend across the economy, often known as the “shadow banking” industry, and not the U.S. central bank.

“The Fed doesn’t have control over the monetary base because the pile of money represented by shadow banking is so much bigger than what the Fed has under its control,” said Lou Brien, a market strategist at DRW Trading in Chicago.

The Chicago Fed’s National Financial Conditions Index shows that economic conditions have in fact loosened from a year ago even though the Fed has raised rates three times since then.

As the flattening yield curve forces investors to chase higher returns to meet investment objectives, the curve could become even flatter, according to Brian Reynolds, chief market strategist at New Albion Partners in New York.

But history suggests it would be some time before the curve inverts, and even longer before stocks take a turn for the worse, he said.

When the yield gap between two-year and 10-year notes was similar to current levels in 2005 at around 80 basis points, it took 11 months for the yield curve to invert, after which stocks gave an annualized return of 14.8 percent before the bear market began 21 months later, Reynolds said.

In 1994, the yield curve took an additional three and a half years to invert from current levels and in that instance stocks returned 21.6 percent on an annualized basis after the inversion before the bull market ended 22 months later, Reynolds said.

Article Link To Reuters: