Thursday, July 6, 2017

Thursday, July 6, Morning Global Market Roundup: Asia Shares Drop On Fed Minutes

By Nichola Saminather
July 6, 2017

Most Asian stock markets fell on Thursday after minutes from the Federal Reserve's last meeting showed a lack of consensus on the future pace of U.S. interest rate increases, while oil prices inched higher following a steep decline a day earlier.

European markets were set for a steady open, with financial spreadbetters expecting Britain's FTSE 100 to be unchanged, Germany's DAX to open up 0.2 percent and France's CAC 40 to start the day 0.1 percent higher.

MSCI's broadest index of Asia-Pacific shares outside Japan was down 0.1 percent. Japan's Nikkei slipped 0.5 percent as a stronger yen depressed the outlook for export earnings.

South Korea's KOSPI and Australian shares both lost 0.1 percent.

China's bluechip CSI 300 index fell 0.5 percent and Hong Kong's Hang Seng slid 0.3 percent.

Trading in Asia has been buffeted this week by tensions on the Korean peninsula after North Korea fired a missile, which U.S. officials concluded was an intercontinental ballistic missile, into Japanese waters.

The United States said on Wednesday it was ready to use force if needed to stop North Korea's nuclear missile program but said it preferred global diplomatic action against Pyongyang.

The Nasdaq closed up 0.7 percent on Wednesday as technology shares recovered. But the Dow Jones Industrial Average was flat and the S&P 500 gained just 0.15 percent.

Fed policymakers were increasingly split on the outlook for inflation and how it might affect the future pace of interest rate rises, according to minutes released on Wednesday of the central bank's June 13-14 policy meeting.

Several officials also wanted to announce a start to the process of reducing the Fed's large portfolio of Treasury bonds and mortgage-backed securities by the end of August, but others preferred to wait until later in the year.

"With the mixed tone from the minutes and the essential delay to the announcement of balance sheet reduction timing, there is no surprise why we are seeing the muted reaction from the markets," Jingyi Pan, market strategist at IG in Singapore, wrote in a note.

U.S. 10-year Treasury yields dipped to 2.3232 percent, but remained near a seven-week high touched on Wednesday.

The dollar retreated 0.3 percent to 112.92 yen on Thursday. The dollar index, which tracks the currency against a basket of trade-weighted peers, was little changed at 96.259.

"The minutes from the June 13-14 FOMC meeting underscore that the start of the balance sheet reduction is on course for this year," Kathy Bostjancic, head of U.S. macro investor services at Oxford Economics, wrote in a note.

"On the interest rate front, we believe rising concerns that the slowdown in the inflation rate could be long-lasting will lead policymakers to forgo additional rate hikes this year and to only raise rates twice (total 50 basis points) in 2018."

Markets are waiting for the release of U.S. non-farm payrolls data for June, due on Friday, for a steer on Fed policy.

The euro pulled back 0.1 percent to $1.13385 on Thursday.

U.S. crude was up 0.75 percent at $45.47 a barrel on Thursday, on strong demand in the U.S., after tumbling by as much as 5.4 percent on Wednesday.

The steep decline on Wednesday came on the back of data showing rising OPEC exports. That snapped an eight-day winning streak for U.S. oil, the longest rally in more than five years.

Brent added 0.8 percent to $48.17 on Thursday, after losing as much as 5.3 percent on Wednesday.

Gold prices were flat at $1,226.69 an ounce.

Article Link To Reuters:

Oil Edges Up On U.S. Crude Stock Draw, But Prices Remain Weak

By Henning Gloystein 
July 6, 2017

Oil prices nudged higher on Thursday on strong demand in the United States, but analysts cautioned that oversupply would continue to drag on markets.

Brent crude futures had risen 18 cents, or 0.4 percent, to $47.97 per barrel.

U.S. West Texas Intermediate (WTI) crude futures were up 19 cents, or 0.4 percent, at $45.32 per barrel.

Traders said the gains reflected firm fuel demand in the United States, where data from the American Petroleum Institute (API) late on Wednesday showed that U.S. crude inventories fell by 5.8 million barrels in the week to June 30 to 503.7 million.

However, overall market conditions remain weak.

Prices tumbled about 4 percent on Wednesday on rising exports by the Organization of the Petroleum Exporting Countries (OPEC), despite its pledge to hold back production between January this year and March 2018 to prop up prices.

"Against expectations, OECD total oil inventories are still above 3 billion barrels and the recovery in Libyan and Nigerian supplies, coupled with a fast return of U.S. shale, should prevent steep stock draws ahead," Bank of America Merrill Lynch (BAML) said, adding that output was set to rise further.

BAML said it was cutting its WTI forecasts to an average $47 per barrel this year and $50 in 2018, down from $52 and $53 previously.

The bank cut its average Brent forecasts to $50 this year and $52 per barrel in 2018, down from $54 and $56 before.

OPEC exported 25.92 million barrels per day (bpd) in June, 450,000 bpd above May and 1.9 million bpd more than a year earlier, according to Thomson Reuters Oil Research.

Researchers at brokerage Sanford C. Bernstein reduced its average Brent crude price forecasts for 2017 and 2018 to $50 per barrel each, down from $60 and $70 previously.

Bernstein said that the reduction was a result of an expected increase in U.S. shale oil output, especially from the Permian field.

Bernstein also said that non-shale supply additions outside OPEC would likely exceed or match production declines of mature fields.

Denmark's Saxo Bank said that oil prices could rise towards $55 per barrel in the coming months, but said it expected lower prices towards the end of the year and into 2018.

"Brent crude oil is likely to rally back towards $55 per barrel during the coming months before renewed weakness sets in as the focus turns to 2018 and the potential risk of additional barrels hitting the market if OPEC and Russia fail to extend the production cut deal beyond Q1 2018," said Ole Hansen, Saxo Bank's head of commodity strategy.

Article Link To Reuters:

U.S. Strategic Oil Reserves Shrink As Shale Offers Supply Buffer

Drawdowns continues as White House pledges to sell more; Rising domestic output to offset need for a flush SPR.

By Sheela Tobben
July 6, 2017

U.S. strategic crude stockpiles have dropped to the lowest level in more than 12 years as the shale boom reduces the nation’s need for an emergency buffer against shortages.

Inventories declined by about 13 million barrels over 17 consecutive weeks as the Energy Department delivered supplies it sold in recent months. That brought stocks down to 682 million as of June 30. In two sales held in January and February, the agency sold almost 17 million barrels of crude from its salt caverns in Texas and Louisiana to companies including Chinese state-owned PetroChina Co. Ltd.

The SPR sales have less impact than in the past because the U.S. doesn’t need that much in storage, said Vikas Dwivedi, senior analyst at Macquarie Capital (USA) Inc. "You only need 60 days of your net import of crude and products in the emergency stockpiles."

Crude oil and refined product net imports stood at 4.23 million barrels a day for the week ended June 23, down from a record high of 14.4 million in November 2005. "Given the fact that we don’t net import that much any more, we only really need 300 million barrels," of SPR crude, Dwivedi said in a phone interview from Houston.

The U.S. set up the reserve in the aftermath of an oil embargo in 1973-1974, when several Middle East states cut off oil supplies to the U.S. Construction of the first surface facilities began in June 1977.

These drawdowns won’t end any time soon. The Trump administration has plans to sell another 270 million barrels of crude from the SPR over the next decade to help reduce the country’s debts. This is over and above the 190 million-barrel sale planned for 2018-2025.

"As soon as Trump got elected, we knew they were not going to be able to finance their plans for tax cuts," said Dwivedi. "So anything that looks like a piggy bank will get broken."

Storm Buffer

The reserve has acted as a buffer against natural disasters along the U.S. Gulf Coast, particularly hurricanes. In September 2005, President George W. Bush authorized the emergency sale of 30 million barrels of crude from the SPR after Hurricane Katrina swept through the Gulf of Mexico, causing massive damage to oil production facilities. Three years later, Hurricanes Gustav and Ike disrupted crude supply to several refineries along the Gulf Coast, prompting the release of 5.39 million barrels of SPR crude. These on-loan barrels were repaid in 2009.

The country’s emergency needs can now be covered with domestic crude supply, which is about 80 percent higher than a decade ago, thanks to developments in horizontal drilling and fracking that boosted production from areas that had been too expensive to tap. Domestic output reached 9.35 million barrels a day last month, the highest since August 2015, and is forecast to increase to above 10 million a day early next year.

The growth in U.S. production has been spread out all over the country, and not concentrated in areas like the Gulf of Mexico, where fields are prone to weather hazards, Dwivedi said. "We won’t knock off producing shale wells because of a storm."

Article Link To Bloomberg:

Energy Giants Court Qatar For Gas Expansion Role Despite Crisis

By Ron Bousso and Dmitry Zhdannikov 
July 6, 2017

The West's three biggest energy corporations are lobbying Qatar to take part in a huge expansion of its gas production, handing Doha an unintended but timely boost in its bitter dispute with Gulf Arab neighbors.

The chief executives of ExxonMobil(XOM.N), Royal Dutch Shell (RDSa.L) and France's Total (TOTF.PA) all met the emir, Sheikh Tamim bin Hamad al-Thani, in Qatar before it announced a plan on Tuesday to raise output of liquefied natural gas (LNG) by 30 percent.

Company and industry sources told Reuters that the CEOs had expressed interest in helping Qatar with its ambition to produce 100 million tonnes of LNG annually - equivalent to a third of current global supplies - in the next five to seven years.

The companies already have large investments in countries on both sides of the dispute, and are keen to remain neutral after Saudi Arabia, the United Arab Emirates, Bahrain and Egypt severed ties with Doha on June 5.

Spokespeople from all three firms declined comment. However, a top executive from one energy major looking into expanding in Qatar said the huge business opportunity was worth the considerable political risk.

"There is only one policy here – you have to behave like a commercial corporation," the executive told Reuters. "You have to make your choices purely economically and be Qatari in Qatar, Emirati in the Emirates."

Energy sales have powered Qatar's rapid rise as a regional player since the late 1990s, and the oil majors' interest in the LNG expansion underline its longer-term economic muscle during the political row with its neighbors.

Chief executives Darren Woods of Exxon and Ben van Beurden of Shell both met the emir after the four Arab countries imposed the sanctions. Total chief Patrick Pouyanne has also visited Doha in recent weeks.

Qatar, the world's largest LNG supplier and second biggest gas exporter after Russia, has some of the lowest production costs. The plan was seen as an opening shot in a price war as Doha tries to defend its market share, especially against supplies from U.S. shale deposits where costs are higher.

Willingness To Invest

The four Arab countries, which have demanded Qatar stop fostering terrorism and courting Iran, said after meeting on Wednesday that Doha's response to their grievances had been negative.

Saudi Foreign Minister Adel al-Jubeir said the political and economic boycott would remain until Qatar improved its policies. Further steps would be taken at the appropriate time, he said.

Doha denies aiding terrorism and its foreign minister, Sheikh Mohammed bin Abdulrahman al-Thani, accused the four of "clear aggression" while adding that Qatar continued to call for dialogue to settle the dispute. 

Exxon, Shell and Total have already invested extensively in Qatar, particularly in projects to liquefy gas, allowing it to be shipped by tanker to consumer markets where transport by pipeline is not feasible.

Woods met the emir on June 26, discussing "cooperation" with Qatar, where Exxon has been present since 1935, according to a statement carried by the state news agency.

Industry sources close to the talks said that "the Exxon CEO was very keen to join the new gas capacity expansion and expressed willingness to invest".

Woods replaced Rex Tillerson, under whom Exxon helped to build Qatar's LNG industry until he left to become U.S. Secretary of State earlier this year.

Exxon will be the largest foreign investor in Qatar in 2017, with most money going into LNG facilities, representing around seven percent of its global portfolio, according to consultancy WoodMackenzie.

Shell's Van Beurden was among the first foreign company leaders to visit Qatar after the crisis broke out, meeting the emir on June 14. This was followed several days later by a new deal under which Qatar will supply Shell, the world's largest LNG trader, with 1.1 million tonnes annually for five years starting in 2019.

Shell's operations in Qatar include Pearl GTL, the world's largest gas liquefaction plant. Its overall investments in the state represent around six percent of its global portfolio.

The three firms had been expecting Qatar to expand its LNG exports since it lifted a self-imposed moratorium on development of the North Field, the world's biggest natural gas field it shares with Iran, the sources said.

Oil and gas companies generally are no strangers to operating in risky areas. This week Total became the first Western energy firm to invest in Iran since the lifting of sanctions against the country. The project, phase 11 of Iran's South Pars development, draws gas from the same reservoir as Qatar's North Field.

Total chief Pouyanne discussed new opportunities in the LNG sector as well as the company's plans to develop the Al-Shaheen oil field on his trip to Doha, according to a senior source.

Qatar's LNG capacity could be boosted by up to 10 million tonnes per year relatively quickly and cheaply by optimizing existing facilities and upgrading a small number of units, a process known as "debottlenecking", according to a senior industry source.

Beyond that, the expansion would require building new liquefaction terminals involving significant investments, which the energy giants can offer.

"Qatar LNG is really an important part of their overall portfolio, especially for Exxon but Total and Shell are also material LNG players there," Tom Ellacott, analyst at WoodMackenzie said.

"Qatar LNG is very competitive. Debottlenecking will be a relatively cheap option to increase capacity, but with the industry at a low point in the cost cycle, it may also be a good time to install new terminals."

Article Link To Reuters:

Rove: The U.S. Specializes In Comebacks

The country has been deeply divided before, but it always manages to pull itself together.

By Karl Rove
The Wall Street Journal
July 6, 2017

The Continental Congress approved it on July 4, but it was July 6 before the Declaration of Independence was printed in a newspaper, namely the Pennsylvania Evening Post (“price two coppers”). So if our forbearers celebrated the nation’s founding over several days, I can stretch the holiday, too—marking it not at home but in Europe, among friends of America who are mystified by what is happening in the United States.

Many do not understand why the world’s most powerful man acts on childish impulses and tweets ugly messages aimed at critics. Nor can they fathom why the world’s oldest political party has twisted itself into mindless opposition—“resistance,” as it’s styled by the extremists who now call the tune for Democrats.

This picture is not reassuring for a world that counts on American leadership. Our anxiety at home is mirrored in the anxiousness of our foreign friends. Still, we’ve been here before. America has appeared broken in the past yet recovered its vigor, creativity, prosperity and leadership.

While researching for my book on the 1896 election, I was taken aback at the quarter-century dysfunctionality of Gilded Age politics. In the five presidential elections before 1896, every winner received less than 50% of the vote. In two contests, the new president took an Electoral College majority but came in second in the popular vote. In a third race, the president came in first in the Electoral College and popular vote, but only by 9,467 ballots nationwide, a 0.02% margin.

There were two years with a Republican president, House and Senate; two years with a Democratic president, House and Senate; and 20 years of divided government in which little was accomplished because the two parties not only had deeply conflicting ideas about policy but were still fighting the Civil War.

After Republicans narrowly captured the House in 1888, Democrats responded by refusing to answer roll calls, thereby denying a quorum to conduct business. This went on for months until, after another fruitless vote, Speaker Thomas Reed directed the clerk to show as present every Democrat on the floor who refused to answer the roll call. All hell broke loose as Democrats attempted to bolt, but Reed had ordered the doors barricaded. Only one member—a Texan—escaped, pummeling a sergeant-at-arms and kicking out door panels to make good his escape.

When the House later debated Reed’s action, another Texas congressman rose and asked fellow Democrats to “order me to remove this dictator” from the podium by force. The speaker ruled him out of order and moved on. The offended Democrat was so angry that during the rest of the debate he sat in front of the podium, methodically sharpening his Bowie knife on his boot heel for hours in an attempt to menace Reed.

Yet along came a new president, elected in 1896, William McKinley. He broke the gridlock, restored the country’s confidence, and ushered in an America Century. Many of us have seen this in our lifetime as Ronald Reagan restored the nation’s spirit when he reversed the decline of the 1970s.

I’m now doing research for a book on presidential decision-making, and I have come across many other moments when America seemed to be coming apart—not just in those desperate years before 1860 or the tumult of riots in cities and on campuses a century later. We also had nullification, an agrarian revolt and the Great Depression, among other periods of disruption.

It is amazing how close our country came to shredding itself as Federalists and Democratic-Republicans came to blows—sometimes literally—over foreign policy and defense in the 18th century’s waning years.

Maybe this time is different. Maybe America is really fading like the Roman Empire. Maybe social media is so corrosive that the damage it does cannot be repaired. Maybe democracy is dying. Maybe the U.S. government is crippled by the “deep state” and fake news. And maybe the lack of trust in Washington, Congress and the presidency cannot be reversed.

But don’t bet on it. America specializes in comebacks. Just as we’ve screwed up in the past and then found our footing, the practical common sense of Americans will assert itself, especially if we recommit ourselves to the enduring truths of the Declaration—to “revere” it, in the words of Abraham Lincoln, and harmonize our “practices and policies” with it. So as our national celebration ends, the responsibilities of ordinary citizens are just beginning. Happy birthday, America!

Article Link To The WSJ:

Trump’s Putin Test

The Russian will interpret concessions as a sign of weakness.

By Review & Outlook
The Wall Street Journal
July 6, 2017

Donald Trump thinks of himself as a great judge of character and master deal-maker, and that could be a dangerous combination when the President meets with Vladimir Putin for the first time Friday during the G-20 meeting in Germany. The Russian strongman respects only strength, not charm, which is what Mr. Trump will have to show if he wants to help U.S. interests abroad and his own at home.

The meeting comes amid the various probes of Russian meddling into the 2016 election, and Mr. Trump’s curious refusal to denounce it. There’s no evidence of Trump-Russia campaign collusion, nor that Russian interference influenced the result. But the Kremlin’s attempt was a deliberate affront to democracy and it has done considerable harm to Mr. Trump’s Presidency. Mr. Trump should be angry at Mr. Putin on America’s behalf, and his apparent insouciance has played into Democratic hands.

The irony is that on policy Mr. Trump has been tougher on Mr. Putin than either of his two predecessors. Over Kremlin objections, the U.S. President has endorsed Montenegro’s entry into NATO and new NATO combat deployments in Eastern Europe. He has approved military action against Russian ally Bashar Assad in Syria even after Russian threats of retaliation.

The White House was also wise to visit Poland a day before he meets Mr. Putin. In Warsaw on Thursday he can reinforce traditional American support for Polish freedom and assert his personal and public support for NATO’s Article 5 that an attack on one alliance member is an attack on all.

Perhaps most important, Mr. Trump has unleashed U.S. oil and gas production that has the potential to weaken Mr. Putin at home and in Europe. The Russian strongman needs high oil prices and wields the leverage of natural-gas supplies over Europe, and U.S. production undermines both.

Yet Mr. Putin will be looking to see if he can leverage Mr. Trump’s desire for better U.S.-Russia relations to gain unilateral concessions. One Kremlin priority is easing Western sanctions for the invasion of Ukraine and President Obama’s December 2016 sanctions for its election interference. The Russian foreign ministry is in particular demanding that the U.S. let Russia reopen compounds in Maryland and New York that Mr. Obama shut down.

Mr. Trump will be tempted to oblige because the compounds are ultimately of no great consequence, but the political symbolism of reopening them would still be damaging if the President gets nothing in return. Mr. Putin still denies any Russian election hacking, and to adapt Michael Corleone’s line to Carlo in “The Godfather Part II,” he should stop lying because it insults our intelligence. Mr. Trump should at least follow French President Emmanuel Macron’s precedent and issue a face-to-face public rebuke unless Mr. Putin apologizes.

Mr. Putin, the former KGB man, concluded early that Barack Obama could be pushed around because he bent to the Russian’s demands on nuclear arms and missile defenses in Europe. This week he’ll be looking to take Mr. Trump’s measure.

The American can quickly show he’s not Mr. Obama by suggesting he’ll sell lethal military aid to Ukraine if Mr. Putin refuses to implement the Minsk accords that call for defusing the military conflict. Mr. Putin knew he could get away with violating Minsk because he judged, correctly, that Mr. Obama would never risk confrontation.

Mr. Trump says he wants good relations with Russia, but the question as always in foreign affairs is on what terms? Mr. Putin wants to push the U.S. out of Eastern Europe and the Middle East, and he will be looking to exploit any presidential weakness toward that goal. No single meeting will determine the Trump-Putin relationship over four years, but first impressions matter. Mr. Trump will have a better chance at a better relationship if he shows Mr. Putin that the price of improved ties is better Russian behavior.

Article Link To The WSJ:

Can U.S. Defend Against North Korea Missiles? Not Everyone Agrees

By Mike Stone
July 6, 2017

Not everybody asserts as confidently as the Pentagon that the U.S. military can defend the United States from the growing threat posed by North Korea's intercontinental ballistic missile capability.

Pyongyang's first test on Tuesday of an ICBM with a potential to strike the state of Alaska has raised the question: How capable is the U.S. military of knocking down an incoming missile or barrage of missiles?

Briefing reporters on Wednesday, Pentagon spokesman Navy Captain Jeff Davis said: "We do have confidence in our ability to defend against the limited threat, the nascent threat that is there."

Davis cited a successful test in May in which a U.S.-based missile interceptor knocked down a simulated incoming North Korean ICBM. But he acknowledged the test program's track program was not perfect.

"It's something we have mixed results on. But we also have an ability to shoot more than one interceptor," Davis said.

An internal memo seen by Reuters also showed that the Pentagon upgraded its assessment of U.S. defenses after the May test.

Despite hundreds of billions of dollars spent on a multi-layered missile defense system, the United States may not be able to seal itself off entirely from a North Korean intercontinental ballistic missile attack.

Experts caution that U.S. missile defenses are now geared to shooting down one, or perhaps a small number of basic, incoming missiles. Were North Korea's technology and production to keep advancing, U.S. defenses could be overwhelmed unless they keep pace with the threat.

"Over the next four years, the United States has to increase its current capacity of our deployed systems, aggressively push for more and faster deployment," said Riki Ellison, founder of the Missile Defense Advocacy Alliance.

Mixed Results

The test records of the U.S. Missile Defense Agency (MDA), charged with the mission to develop, test and field a ballistic missile defense system, also show mixed results.

MDA systems have multiple layers and ranges and use sensors in space at sea and on land that altogether form a defense for different U.S. regions and territories.

One component, the Ground-based Midcourse Defense system (GMD), demonstrated a success rate just above 55 percent. A second component, the Aegis system deployed aboard U.S. Navy ships and on land, had about an 83 percent success rate, according to the agency.

A third, the Terminal High Altitude Area Defense, or THAAD, anti-missile system, has a 100 percent success rate in 13 tests conducted since 2006, according to the MDA.

Lockheed Martin Corp is the prime contractor for THAAD and Aegis. Boeing Co is the lead contractor for GMD.

Since President Ronald Reagan's administration in the 1980s, the U.S. government has spent more than $200 billion to develop and field a range of ballistic missile defense systems ranging from satellite detection to the sea-based Aegis system, according to the Congressional Research Service.

Funding for MDA was on average $8.12 billion during President Barack Obama's administration that ended on Jan. 20. President Donald Trump has requested $7.8 billion for fiscal year 2018.

'Another Year Or Two'

Last month, Vice Admiral James Syring, then director of the Missile Defense Agency, told a congressional panel that North Korean advancements in the past six months had caused him great concern.

U.S.-based missile expert John Schilling, a contributor to the Washington-based North Korea monitoring project 38 North said the pace of North Korea's missile development was quicker than expected.

"However, it will probably require another year or two of development before this missile can reliably and accurately hit high-value continental U.S. targets, particularly if fired under wartime conditions," he said.

Michael Elleman, a fellow for Missile Defence at the International Institute for Strategic Studies, said that although North Korea was several steps from creating a dependable ICBM, "There are absolutely no guarantees" the United States can protect itself.

In missile defense, "Even if it had a test record of 100 percent, there are no guarantees."

Article Link To Reuters:

Tillerson Says Trump, Putin To Seek Common Ground Over Syria

Cease-fire, safe-zone idea will be raised in Hamburg meeting; Overture signals willingness for improved ties with Putin.

By Nick Wadhams
July 6, 2017

President Donald Trump will raise the possibility of U.S. and Russian cooperation on easing the Syria conflict when he meets his Russian counterpart in Hamburg, Secretary of State Rex Tillerson said.

Tillerson’s statement -- coming just two days before Trump and Putin meet in Germany -- reflects a U.S. determination to avoid getting too deeply embroiled in maintaining the peace in Syria while also signaling a willingness for improved ties with Russia, which entered the Syria conflict in 2015 on behalf of Syrian President Bashar al Assad. It’s also the most detailed description yet of a topic the two leaders will discuss.

Russia bears primary responsibility for providing for the needs of the Syrian people and for ensuring that none of Syria’s warring factions take territory liberated from the terror group, Tillerson said in the statement. Russia also has an obligation to ensure that Assad’s regime doesn’t use chemical weapons again, he said.

"The United States and Russia certainly have unresolved differences on a number of issues, but we have the potential to appropriately coordinate in Syria in order to produce stability and serve our mutual security interests," Tillerson said in the statement.

The initiative bears echoes of a proposal circulated under President Barack Obama, when Secretary of State John Kerry and his Russian counterpart, Sergei Lavrov, sought -- and ultimately failed -- to establish a so-called Joint Implementation Group aimed at easing the conflict enough to pave the way for negotiations for a permanent resolution. Tillerson’s statement, while lengthy, provided no further details of what he called “a topic the president will raise in his meeting with Russian President Putin.”

In remarks to reporters Wednesday night before leaving Washington for Hamburg, Tillerson said the outreach to Russia reflects an "effort that serves both of our interests as well as the broader interest of the international community."

"But we’re at the very beginning, and I would say at this point it’s difficult to say exactly what Russia’s intentions are in this relationship, and I think that’s the most important part of this meeting -- to have a good exchange between President Trump and President Putin over what they both see as the nature of the relationship between our countries," Tillerson added.

U.S. officials, including Brett McGurk, the U.S. envoy for the coalition to fight the Islamic State, have been quietly meeting with Russian counterparts for weeks to lay the groundwork for such cooperation. The Wall Street Journal reported June 9 that the administration was speaking with Russia to set up a de-escalation zone in southwest Syria.

Article Link To Bloomberg:

EU Considers Record Fine As Panel Checks Google Android Case

By Foo Yun Chee 
July 6, 2017

EU antitrust regulators are weighing another record fine against Google over its Android mobile operating system and have set up a panel of experts to give a second opinion on the case, two people familiar with the matter said.

Assuming the panel agrees with the initial case team's conclusions, it could pave the way for the European Commission to issue a decision against Alphabet's (GOOGL.O) Google by the end of the year.

The Commission in April last year charged Google with using its dominant Android mobile operating system to shut out rivals following a complaint by lobby group FairSearch, U.S.-based ad-blocking and privacy firm Disconnect Inc, Portuguese apps store Aptoide and Russia's Yandex (YNDX.O).

The move by the EU competition authority, which hit the company with a 2.4 billion euro ($2.7 billion) penalty for unfairly favoring its shopping service last month, could pose a bigger risk for the world's most popular internet search engine because of Android's huge growth potential.

The potential fine is expected to top that 2.4 billion euro penalty. The EU's charge sheet issued to Google in April last year said the anti-competitive practices started from January 2011 and the Commission is likely to tell the company to stop them. They are still ongoing, telecoms industry sources said.

Commission spokesman Ricardo Cardoso and Google both declined to comment.

The EU ruling has the scope to do the most damage compared with a third case against Google's AdSense, Richard Windsor, an independent financial analyst who tracks competition among the biggest U.S. and Asian internet and mobile companies, said in a recent note.

"If Google was forced to unbundle Google Play from its other Digital Life services, handset makers and operators would be free to set whatever they like by default potentially triggering a decline in the usage of Google's services," he said, referring to Google's apps store.

Taking A Toll

The long-running case is taking its toll on users and rivals, FairSearch lawyer Thomas Vinje said.

"A decision would come none too soon. Google is hurting Android users, including by surreptitiously commandeering ever-increasing amounts of personal data," Vinje said.

The EU competition enforcer said Google's tactics include requiring smartphone makers to pre-install Google Search and the Google Chrome browser in return for access to other Google apps, and barring the manufacturers from using rival versions of Android.

The company was also accused of paying smartphone makers and mobile network operators to only install Google Search on their devices.

Google said at the time that Android was a remarkable system based on open-source software and open innovation and was good for competition and for consumers.

The Commission had planned to establish a peer review panel, also known as a devil's advocate, in June, the people said.

Such panels are usually made up of three to four experienced officials who examine the case team's conclusions with a fresh pair of eyes to ensure that the case is robust. They usually take three to four weeks to complete their work although this could be extended. It was not clear if the panel has started work yet.

Article Link To Reuters:

Britain's Finance Industry Faces 'Tipping Point' Over Brexit

By Andrew MacAskill and Huw Jones
July 6, 2017

Britain will lose its status as Europe's top financial center unless it keeps borders open to specialist staff, improves infrastructure and expands links with emerging economies, TheCityUK said in a report published on Thursday.

The report from Britain's most powerful financial lobby group said continental Europe might eventually become the preferred destination for banks, insurers and asset managers as they relocate business there to retain access to the EU single market.

Although companies may begin by initially shifting a small number of jobs to Europe this may begin to accelerate when property leases expire, they carry out business reviews, or when the cost of capital becomes uneconomical.

"Shifts out of the UK may gradually erode the 'cluster effect' of the financial ecosystem, with the threat of a tipping point in the ecosystem being reached," the group said in a 83-page document outlining how the industry can thrive over the next decade.

Securing a favorable deal for financial services from the Brexit negotiations is one of the biggest challenges for the British government because it is its largest export sector and biggest source of corporate tax.

Britain's finance industry could lose up to 38 billion pounds ($49 billion) in revenue in a so-called "hard Brexit" that would restrict its access to the EU single market, according to some estimates.

The report said the government must ensure businesses can recruit people to fill skill gaps and must simplify the process of getting a visa.

Brexit has already made it harder to attract people to Britain and the government is introducing policies making immigration more restrictive and expensive, the report said.

It said the cost of hiring an employee on a five-year visa has risen by 250 percent to 7,000 pounds over the last year and the minimum salary a business may recruit staff for a visa has risen by almost half since 2015.

Aside from Brexit, the report also looks at broader issues that threaten the competitiveness of the City of London as financial services hub, including a need to invest in transport networks and technology.

It calls for government and financial services to work together closely to develop international trade policies and to improve the country's digital and physical infrastructure, including speeding up travel times between airports and different financial centers around Britain.

One financial services industry veteran who had independent access to the report said it lacked urgency and there was too little on the impact of Britain leaving the EU given that "Brexit is a catastrophe for the City."

Mark Hoban, a former financial services minister who chaired the report, said that Brexit was only one of several challenges facing financial services.

"The challenges facing financial services are much more than just about Brexit. It is about emerging financial centers and also, to a degree, about unmet needs in the UK as well," Hoban told Reuters.

"There is a very clear appetite to tackle these issues at various levels of government."

($1 = 0.7748 pounds)

Article Link To Reuters:

Richard Branson Rips ‘Terrible’ Brexit, Trump’s ‘Dangerous’ Policies

British mogul speaks out during airplane interview.

By Mike Murphy
July 6, 2017

Billionaire Richard Branson is no fan of Brexit or President Donald Trump’s administration, and sharply criticized both Wednesday during a CNBC interview.

The Virgin Group founder said the rise of protectionism in the U.S. and U.K is “so unhealthy” for the global economy.

“What happened with Brexit is a terrible, terrible mistake...It may take years for it to recover.” --  Richard Branson

“What happened with Brexit is a terrible, terrible mistake, both for Europe and for Great Britain, and will set Great Britain back. It may take years for it to recover,” he said. “If we do see a hard Brexit, that will be catastrophic for Britain and damaging for Europe too.”

But Branson said he was encouraged by the losses Prime Minister Theresa May’s Conservative Party suffered in recent parliamentary elections, and that voters may be having second thoughts as to the wisdom of Britain leaving the European Union. “Some sense is finally beginning to prevail,” he said, adding that he thought “the possibility of a hard Brexit has now gone away.”

Branson said young people will suffer the most from Brexit, and remained optimistic that there will eventually be a second referendum to overturn the “leave” vote.

As for Trump, Branson called policies like the travel ban targeting six predominantly Muslim countries “dangerous.”

“What is happening in America at the moment is extremely unhealthy and dangerous,” he said. “I’m hopeful things will reverse in America and decency will come back.”

Branson, who owns 10% of Virgin Australia VAH, +3.03% , spoke while on the airline’s maiden flight between Melbourne and Hong Kong.

Article Link To MarketWatch:

China Could Export A Recession To Everyone Else

-- Former IMF economist Kenneth Rogoff said high debt levels in China were a big concern
-- China could export a recession, he said

By Huileng Tan
July 6, 2017

Soaring debt levels in China were a serious concern as the fallout of any crisis would hit everyone else, said a former International Monetary Fund (IMF) economist on Thursday.

"If there's a country in the world which is really going to affect everyone else and which is vulnerable, it's got to be China today," Kenneth Rogoff, economics professor at Harvard University, told CNBC's "Squawk Box" on Thursday.

"The whole region's dependent on China... so I certaintly think you could see (the export of) a recession out of China," added Rogoff, who was chief economist and research director at the International Monetary Fund from 2001 to 2003.

His comments came as the world second-largest economy grapples with growing pains, while trying to rein in high debt levels.

"They are trying to keep up their growth, (but) there are lot of factors that would constrain it, particularly as they move from being export-led to domestic-driven," he added.

Just as shifting gears to a consumption-led economy has been tough for everyone else, it would also be difficult for China, Rogoff said. China has fueled its explosive growth via a massive credit buildup.

"China has a lot of capacity to absorb its credit problems, because in some sense, the private sector has a government shell over it, but it depends on rapid credit growth to grow," he said. "When they slow down credit, growth slows down. So you don't necessarily have to have cascading defaults to have a pretty sharp drop in growth," he said.

Concerns over China's economy have grown as policy makers' stimulus efforts have also spurred a leverage buildup.

In late May, Moody's Investors Service expressed concern that China's effort to support economic growth would spur higher debt levels, and the ratings service downgraded the mainland's sovereign credit rating to A1 from Aa3, changing its outlook to stable from negative.

In a recent note, Nomura estimated that China's outstanding non-financial sector debt hit 191.3 trillion yuan ($27.96 trillion), or 251 percent of gross domestic product (GDP) in the first quarter, up from 158.3 trillion yuan, or 231 percent of GDP, at the end of 2015.

Moody's estimated that the government budget deficit in 2016 was "moderate" at around 3 percent of gross domestic product (GDP). But it expected the government's debt burden would rise toward 40 percent of GDP by 2018 and 45 percent by the end of the decade.

Official data put total government debt at the end of 2016 was 37 percent of GDP, the Institute of International Finance said in a May note.

Article Link To CNBC:

Investor In Martin Shkreli's Fund Says He Made Millions

By Brendan Pierson
July 6, 2017

One of the investors former drug company executive Martin Shkreli is accused of defrauding testified on Wednesday that Shkreli lied to him repeatedly, although he eventually made millions of dollars from the investment.

Darren Blanton, a Dallas-based biotechnology investor who appeared in Brooklyn federal court as a witness for U.S. prosecutors, told jurors he invested in Shkreli's hedge fund MSMB Capital after being told the fund was managing $35 million in assets and had an independent auditor.

He said he later learned both of those claims were false and found Shkreli evasive when he tried to get some of his money back. Blanton said he eventually filed a whistleblower complaint with the U.S. Securities and Exchange Commission.

Under cross-examination by Shkreli's lawyer, Benjamin Brafman, Blanton conceded that despite his misgivings, his $1.25 million investment with Shkreli paid off, largely through an agreement in which Shkreli gave him shares in his drug company Retrophin Inc.

Blanton said he still holds 150,000 shares of Retrophin, worth nearly $3 million at Wednesday's closing price of $19.83 per share, and previously sold shares worth $2.4 million. He also said he received a cash payment of $200,000.

Prosecutors have claimed the agreement between Blanton and Shkreli, termed a consulting agreement, was a sham.

Blanton said Shkreli founded Retrophin after learning that a friend of Blanton's had lost a son to a rare disease, myotubular myopathy, and vowed to find a cure.

Brafman's cross-examination is expected to continue on Thursday.

The testimony came after U.S. District Judge Kiyo Matsumoto ordered Shkreli to stop talking about his case in or around the Brooklyn courthouse where the trial is taking place. Five days earlier Shkreli had burst into a room full of spectators and attacked the credibility of a government witness.

Shkreli, 34, gained notoriety in 2015 when he raised the price of a life-saving drug by 5,000 percent as CEO of Turing Pharmaceuticals, sparking outrage among patients and U.S. lawmakers. He at times reveled in the negative publicity as he came to be known as "pharma bro" and his Twitter harassment of a journalist led to him being banned from the social media platform.

The charges he now faces stem not from his time at Turing, but from his management of MSMB Capital, another fund called MSMB Healthcare and Retrophin between 2009 and 2014. Prosecutors say he deceived investors in the funds and eventually repaid them with money stolen from Retrophin.

Article Link To Reuters:

How Many Jobs Does ObamaCare Kill?

We surveyed managers at small businesses and put the count at 250,000.

By Casey B. Mulligan
The Wall Street Journal
July 6, 2017

Democrats loudly complain that people will lose health insurance if the Affordable Care Act is repealed. They never mention those who lose jobs because the ACA remains.

The ACA includes a penalty on employers that fail to provide “adequate” insurance for full-time workers. Thanks to the ACA, hiring the 50th full-time employee effectively costs another $70,000 a year on top of the normal salary and benefits.

Many business owners have described how this penalty prevents them from hiring and has caused them to reduce work hours to below the full-time threshold. ACA supporters dismiss these statements as “mere anecdotes” not corroborated by national sampling and statistical analysis. But did any of them rush out to gather the national samples, especially after Jan. 1, 2016, when the employer penalty took full effect?

In partnership with the Mercatus Center at George Mason University, in March 2017 I was able to commission Hanover Research to survey small businesses nationwide regarding their hiring and compensation practices. The result was a sample of 745 small businesses, representing every major industry and together employing almost 50,000 people.

We asked managers (almost evenly divided between Democrats and Republicans) how many people each business employed and whether it offers health insurance. Many businesses, when they do not offer coverage, keep their payrolls just below 50 full-time employees and thereby narrowly escape the ACA’s penalty. This pattern is not visible among businesses that offer coverage.

When we followed up, the businesses employing just fewer than 50 often said the ACA caused them to hire less and cut hours below the full-time threshold. The penalty caused payrolls to shrink or prevented them from growing.

Nationwide, we estimate the ACA-inspired practice of keeping payrolls below 50 has cost roughly 250,000 jobs. This does not count jobs lost when businesses close (we didn’t survey closed businesses) or shrink because of other ACA incentives.

The tally of lost jobs is bound to grow because the penalty itself automatically grows and the IRS is still learning how to enforce it. And the businesses we surveyed disproportionately say that they reduce hiring and hours for new employees rather than existing employees. They may continue to shrink until their payrolls are fully turned over.

Does the ACA at least spur small business to offer coverage? About a third of those now offering coverage began doing so after the ACA was passed. But two-thirds of those now not offering coverage previously did offer it. Some of the managers said the exchanges are a new option and that offering coverage at work would render employees and their families ineligible for taxpayer assistance.

No doubt a few of the 250,000 lost jobs are replaced at businesses that weren’t seeking to duck the 50-employee threshold. But even reallocated jobs are a problem, because the reallocation is motivated by uneven federal incentives unrelated to creating value in the marketplace.

The ACA is an important reason why the growth rates of employment, wages, productivity and GDP continue to be substandard. Maybe it is time for repeal.

Article Link To The WSJ:

Tesla Is Starting To Face Serious Competition

Volvo's two biggest markets have excellent incentives for electric vehicle production and bad ones for imports.

By Leonid Bershidsky
The Bloomberg View
July 6, 2017

Volvo's announcement that it intends to starts phasing out purely gasoline- and diesel-powered cars starting in 2019 in favor of electrified models appears strategically timed to coincide with the start of production of Tesla's Model 3, which should be hitting the streets by the end of this month. It's scary news for Tesla: The market for electric cars is largely government-driven, and Chinese-owned Volvo is taking advantage of especially generous government support.

Volvo's model cycle is about seven years. This means it'll keep making purely gasoline- and diesel-powered cars for some time past 2019, but the new models will be, at the very least, hybrids; all of them will have electric engines. "This is about the customer," the company's press release quoted Volvo chief executive Hakan Samuelsson as saying. "People increasingly demand electric cars."

That, however, is not quite true. Most electric and hybrid vehicles are sold in countries where government incentives are the strongest. There aren't many countries where fully electric vehicles and plug-in hybrids amounted to more than 1 percent of new cars sold in 2016, and in most of them, government stimulus -- of both the stick and the carrot variety -- is strong. As soon as the stimulus drops off, so do electric car sales. That happened in Denmark last year, where an attempt to phase out tax breaks resulted in a 71 percent drop in battery-powered vehicle sales and a 49 percent reduction in hybrid sales in 2016, according to the International Energy Agency. It happened in the Netherlands, where tax breaks on hybrids (but not on battery-powered cars) were cut and sales plummeted by 50 percent.

"Electric car market mechanisms are still largely driven by policy support," the International Energy Agency has concluded.

Volvo's unique advantage is that its two home markets -- Sweden and China -- are among the countries with the most generous government incentives, even though both have cut them slightly in recent months.

Sweden -- where 6 percent of all cars sold last year were electrified, the third biggest share in the world after Norway and the Netherlands -- offers a rebate of up to $4,500 with the purchase of fully electric vehicles and about half that much for plug-in hybrids. The latter are often bought by corporations because they're incentivized to do it by the government. In China, the central government subsidizes the purchase of electric cars by a maximum of $6,300, and provincial governments are allowed to add up to half as much to the subsidy. It's also easier to register an electric car than a traditional one in large Chinese cities. These incentives will stay in place in China at least until 2020.

In the U.S., meanwhile, the federal government offers tax credits of between $2,500 and $7,500 per electric car (and states can add to that), but they will be phased out for each manufacturer as soon as it sells a total of 200,000 cars -- something that should happen to Tesla quite soon if everything goes to plan with the Model 3.

Tesla sells cars in China, but isn't a major player. In 2016, it supplied just 7,548 of the 257,000 battery-powered vehicles sold in that country. The reason is that the Chinese government taxes imported cars at 25 percent. In the European Union, which includes Sweden, the tariff on car imports is 10 percent. A U.S. manufacturer faces an instant disadvantage, especially with a mass-market car, compared with a firm that makes vehicles in the world's biggest and third-biggest markets, China and the European Union. The import duties ruin the effect of electric car incentives.

Because suppliers capture a bigger share of the profit from electric vehicles than from traditional cars, large volumes are necessary for production to make economic sense for companies even when each individual car is sold at a profit (something that BMW says is true of its electric models, but Tesla can't say of its pre-Model 3 range). Automakers that produce electric cars in China and Europe are more likely to achieve large volumes than Tesla, with its U.S.-based production. In January through April 2017, 126,000 plug-in vehicles (hybrid and battery-powered) were sold in China and Europe, compared with 41,000 in the U.S.

No wonder Tesla is talking to the Shanghai provincial government to set up a factory. It will, however, take it longer than Volvo, the German automakers -- Volkswagen, BMW and Daimler -- or General Motors, which are already building cars in China and investing in electric vehicle production there.

Besides, these companies, unlike Tesla, aren't hung up on making battery-powered vehicles only. Volvo doesn't intend to drop gasoline and diesel engines for all new models -- it will merely supplement them with electric motors. That way, consumers for whom battery-powered vehicles aren't practical because of shorter range and longer charging times can get more choice.

Now that the established manufacturers are playing in the electric vehicle space, their greater versatility, geographic reach and financial resources make the world a dangerous place for Tesla. Soon, it'll be tested by the kind of competition to which "legacy" carmakers have long been accustomed, and it will be attacked from commanding positions.

Article Link To The Bloomberg View:

Tesla Shares Dive 7 Percent; Still Above Analysts' Target Price

By Saqib Iqbal Ahmed and Parikshit Mishra
July 6, 2017

Tesla Inc shares slid more than 7 percent on Wednesday, their biggest percentage decline in more than a year, on poorer-than-expected delivery numbers, yet the luxury electric carmaker's stock price remained above analysts' median target.

Silicon Valley-based Tesla overtook General Motors in April to become the U.S. carmaker with the largest market capitalization.

On Wednesday, its shares fell 7.2 percent to $327.09, its lowest in more than a month. Its biggest daily percentage fall since June 22, 2016, followed a 2.5 percent decline on Monday, when first-half deliveries of Tesla electric sedans and SUVs came in the lower end of its forecast.

Tesla said a "severe shortfall" of new battery packs had constrained vehicle manufacturing, and said second-half deliveries of the Model S sedan and Model X sports utility vehicle should exceed those of the first half.

"We see Tesla shares as an over-valued show-me story that has traded as a concept stock given the dislocation between share price performance and our/consensus estimates," analysts at Cowen and Company said in a note.

Even after the sharp losses, Tesla shares remained up about 53 percent this year.

Even after the two-day slide, the stock remained about 7 percent above the median price target of $309.50. Less than 20 S&P 500 Index constituents can top that.

On average, S&P 500 stocks trade between 7 percent and 9 percent below the Street's target, according to Thomson Reuters data.

While Tesla has been trading above the median target price for months, that margin mushroomed in June with the stock trading as much as 25 percent above the median target.

Some 14 of the 21 analysts who cover Tesla have a sell or hold rating on the shares.

Zhejiang Geely Holding Group-owned Volvo said all car models it launches after 2019 will be electric or hybrids, making it the first major traditional automaker to set a date for phasing out vehicles powered solely by the internal combustion engine.

While the Volvo announcement could be seen as validation for Tesla CEO Elon Musk’s vision, it also highlights the intense competition Tesla is likely to face, Barclays analyst Brian Johnson said in a research note.

On Wednesday, Goldman Sachs cut its six-month price target on Tesla to $180 from $190. Andrew Left of short seller Citron Research told CNBC in a phone interview that he thinks that is fair in the short term.

Article Link To Reuters:

It’s Still Not Time To Jump Back Into Popular Tech Stocks

‘Smart money’ isn’t chasing AMD and Nvidia.

By Nigam Arora
July 6, 2017

I have been getting a flood of requests from investors for an update on smart-money flows in popular technology stocks.

I previously wrote about this on June 15 and June 16.

The highest interest among investors is in Advanced Micro Devices AMD, +8.56% and NVDA, +2.67% Both stocks have recently had several positive news triggers. However, both have pulled back in spite of that. Perhaps this is the reason for the very high interest among investors who we hear from.

The interest level in FAAMG stocks is high but pales in comparison to that for these two. The FAAMG stocks are Facebook, Apple, Amazon, Microsoft and Google parent Alphabet. The popular FAANG acronym includes Netflix but not Microsoft.

Click here to see money flows in these popular technology stocks segmented by important categories, including “smart money” flows, and ranked as provided to The Arora Report subscribers. Our assessments of “smart money” flows are based on proprietary algorithms that dissect every trade and have been refined over decades.

In general, the conclusion is that the “smart money” is not buying this dip but is instead booking some profits.

Actions Speak Louder Than Words

Actions speak louder than words. For this reason, I will simply share with you what we are doing with these stocks. We undertook short-term trades on AMD twice. The first buy was on rumors of a big order from Apple. The trade was exited with handsome profits. The second buy came when AMD had pulled back and news came that it was selected by the Energy Department for its next-generation supercomputer architecture, called the Exascale Computing Project. This trade was exited with very nice profits immediately on news that Nvidia is introducing a new platform for mining cryptocurrencies such as bitcoin. This profit-taking was fortuitous as AMD shares fell after our exit. Both Advanced Micro Devices and Nvidia compete in providing chips used to mine cryptocurrencies.

We have taken profits and exited our longer-term position in Microsoft MSFT, +1.33% .

We are still holding a long-term Apple AAPL, +0.41% position but our average buy price is $18.71. We are still holding Facebook FB, +1.29% long term but our average price is $49.92. For those who bought popular technology stocks for a short-term trade, we gave a sell signal on June 7, when these stocks were trading near their highs prior to the pullback.

Our algorithms also calculate buy zones for these stocks. Currently these buy zones are below where these stocks are trading now.

In a nutshell, we have taken some profits in technology positions but continue to hold several long-term positions. We have profitably done some short-term trades. The plan continues to be to initiate or add on dips in our buy zones for longer-term positions and undertake some short-term trades when good set ups appear.

Article Link To MarketWatch:

Why Soaring Assets And Low Unemployment Mean It’s Time To Start Worrying

Today’s conditions expose vulnerabilities that make a recession or market meltdown more likely.

By Greg Ip
The Wall Street Journal
July 6, 2017

If you drew up a list of preconditions for recession, it would include the following: a labor market at full strength, frothy asset prices, tightening central banks, and a pervasive sense of calm.

In other words, it would look a lot like the present.

Those of us who have lived through economic mayhem before feel our muscle memory twitch at times like this. Consider the worrisome absence of worry. “Implied volatility” measures the cost of hedging against big market moves via options. When fear is pervasive, options are expensive so implied volatility is high. At present, implied volatility in bonds, stocks, currencies and gold sits near its lowest since mid-2007, the eve of the financial crisis, according to a composite measure maintained by Variant Perception, a London-based investment advisory.

The economic expansion is now entering its ninth year and in two years will be the longest on record. The unemployment rate sits at 4.3%, the lowest in 16 years, suggesting the economy has reached, or nearly reached, full capacity.

Expansions don’t die of old age, economists like to say. On the other hand, should we really assume this one will be a record breaker? From a level this low, unemployment has more room to go up than down. Another ominous sign: Central banks are tightening monetary policy, which has preceded every recession. The Fed has raised rates three times since December and last week central banks in Britain, the eurozone and Canada all hinted that years of easy money were coming to an end.

Still, the presence of recession preconditions isn’t enough to say one is imminent. To understand implied volatility, think of hurricane insurance. Right after a storm, homeowners are more anxious to have coverage, even as insurers withdraw, which of course means premiums spike. As years go by without another hurricane, homeowners let their coverage lapse, insurers return and premiums drop. Similarly, implied volatility is low today because years without a financial calamity have sapped demand for hedging while enticing sellers with the prospect of steady income in exchange for potentially huge losses. But just as hurricane premiums don’t predict the next hurricane, low implied volatility tells us nothing about whether or when a downdraft will actually come.

Similarly, when unemployment got nearly this low in 1989 and again in 2006, a recession was about a year away; but in 1998, it was three years away, and in 1965, four years. A narrowing spread between short-term interest rates and long-term rates comparable to the present has happened 12 times since 1962, and only five times did recession follow within two years.

But if today’s conditions don’t dictate a recession or a market meltdown, they expose vulnerabilities that make either more likely in the face of some catalyzing event.

When ​growth is steady and interest rates are low for years, investors and businesses behave as if those conditions will last forever. That’s why even with muted economic growth, stocks are trading at a historically high 22 times the past year’s earnings. It’s also why home prices have returned to their pre-crisis peaks in major American cities. Real estate has scaled even greater heights in Australia, Canada and parts of China, which exhibit some of the same lax lending and wishful thinking that underlay the U.S. housing bubble a decade ago.

Companies meanwhile have responded to slow, stable growth and low rates by borrowing heavily, often to buy back stock or pay dividends. Corporate debt as a share of economic output is at levels last seen just before the past two recessions.

When everyone acts as if steady growth and low volatility will last forever, it guarantees they won’t. Once asset prices fall, the flow of credit that sustained them dries up, aggravating the correction. Corporate leverage is at levels that in the past led to weakening corporate bond prices and greater equity volatility, says Jonathan Tepper, founder of Variant. “A high proportion of companies won’t be able to pay back debt.” A selloff in corporate bonds and stocks could become self-reinforcing as those who insured against such a move sell into it to limit their own losses.

Of course, some things are different this time. The post-crisis regulatory crackdown means if asset prices fall, they probably won’t take banks down with them. Last week Janet Yellen, the Fed chairwoman, said she thought there wouldn’t be another financial crisis “in our lifetimes.” Fair enough: crises as catastrophic as the last happen twice a century. But small crises are inevitable as risk migrates to financial players who haven’t drawn the attention of regulators. “Elevated asset valuation pressures today may be indicative of rising vulnerabilities tomorrow,” Fed vice chairman Stanley Fischer warned last week.

Inflation is uncomfortably low rather than too high as in previous cycles, which makes it less likely central banks will have to raise interest rates sharply or rapidly. But in a world with permanently lower inflation and growth, businesses will struggle to earn their way out of debt, and interest rates will bite at lower levels than before. This confronts the Fed with a dilemma. If bond yields remain around 2% to 2.5%, the Fed may be playing with fire by pushing rates to 3%, as planned. If it backs off those plans, it could egg on excesses that make any reversal more violent.

Ms. Yellen and Mr. Fischer, both veterans of past mayhem, need to be on guard for a repeat. So should everyone else.

Article Link To The WSJ:

The Fed Follows A Script, But Inflation Isn't Playing Its Part

Where are the wage increases that should go along with such low unemployment?

By Daniel Moss
The Bloomberg View
July 6, 2017

The Federal Reserve still has faith, even if some economic numbers are moving the wrong way.

The minutes of Fed officials' June 13-14 meeting tell us something about the current soft patch in U.S. data, especially inflation.

The Fed is largely sticking to the script. The retreat in inflation is transitory, idiosyncratic even, and the slow-but-steady slog back toward the central bank's 2 percent target will probably resume. The overall tone is one of economic optimism, guarded in places, and helped by a better global picture. Gradual interest-rate increases can continue, with some debate about timing and magnitude. The lack of wage growth and inflation doesn't seem to shake most officials' confidence.

Why is this important? It's tied up with the question of when the very low unemployment rate will result in significant and consistent wage increases, arguably the most important missing ingredient since the economy began growing again in the second half of 2009. Without inflation, workers are less likely to agitate for higher pay. And without jumps in compensation, it's tougher for inflation to get back to a healthy level.

Granted, the labor market keeps strengthening, even if wages have been subdued. At 4.3 percent, the jobless rate keeps punching through the Fed's forecasts and is below the level officials consider is sustainable over the long run. At this point, the prevailing wisdom is that there is so little slack that wages and inflation just have to -- at some point -- really start to pick up.

So what did Fed officials have to say about this during their June discussion?

Some signs of light: "Contacts in several Districts reported shortages of workers in selected occupations and in some cases indicated that firms were significantly increasing salaries and benefits in order to attract or keep workers."

The next sentence gave more cause for concern: "However, other contacts reported only modest wage gains, and participants observed that measures of labor compensation for the overall economy continued to rise only moderately despite strengthening labor market conditions."

No real sign of alarm here, though there is an element of doubt starting to creep in to the central bank's discussions. It matters because quite a bit of data lately has been moving the wrong way or falling short of economists' estimates.

True, the last couple of years have shown a pattern of softness at the start of the calendar year followed by a pickup. But there was reason for hope: The measure of inflation the Fed most closely watches, the personal consumption expenditure price index, breached the 2 percent target in February. Then it began to slip, to 1.8 percent in March, then 1.7 percent in April and, finally, to the 1.4 percent recorded in May. So much for that.

Instead of economic momentum picking up as many market participants anticipated, activity seems to have slipped back into the world of 2 percent. Take the Atlanta Fed's GDPNow forecast for second-quarter economic growth. It's retreated to about 3 percent. Not terrible and entirely consistent with where the overall economy has been since it began growing again, but the direction is clear. In early May, it was 4.3 percent. By early June it was 3.4 percent.

Similarly, the IMF last week nudged down its forecasts for American growth to 2.1 percent from 2.3 percent. Again, not a dramatic shift. Solid, steady, unspectacular and probably durable. And it's true the IMF has become more optimistic about global prospects, which helps the U.S.

But it's still more of the same. Not the takeoff in wages or overall activity that should be happening at this point in the economy's expansion or, critically, with the jobless rate at 4.3 percent.

The Bloomberg U.S. Economic Surprise Index tells a similar story. The gauge, which measures how the economic data compare with economists' estimates, slipped below zero last month -- indicating disappointments. That was the first time since November's general election.

But none of this is necessarily squaring with acceleration in wages or a return to a level of inflation that matches the Fed's target. It should be happening by now.

A slight whiff of doubt in the minutes from at least some participants: "Several participants expressed concern that progress toward the Committee’s 2 percent longer-run inflation objective might have slowed and that the recent softness in inflation might persist. Such persistence might occur in part because upward pressure on inflation from resource utilization may be limited, as the relationship between these two variables appeared to be weaker than in previous decades."

First, the big rap on the expansion was that it was a jobless recovery. Then the unemployment rate fell, and it became the wageless recovery.

Fed officials still believe in their "slow and steady" approach, mostly. The rest of us wait for the data to back them up.

Article Link To The Bloomberg View:

Fed Minutes Suggest Increasing Tensions On Inflation Shortfall

By Lindsay Dunsmuir and Jason Lange
July 6, 2017

Federal Reserve policymakers were increasingly split on the outlook for inflation and how it might affect the future pace of interest rate rises, according to the minutes of the Fed's last policy meeting on June 13-14 released on Wednesday.

The details of the meeting, at which the U.S. central bank voted to raise interest rates, also showed that several officials wanted to announce a start to the process of reducing the Fed's large portfolio of Treasury bonds and mortgage-backed securities by the end of August but others wanted to wait until later in the year.

"Most participants viewed the recent softness in these price data as largely reflecting idiosyncratic factors...however, several participants expressed concern that progress...might have slowed and that the recent softness in inflation might persist," the Fed said in the minutes.

The committee questioned why financial conditions had not tightened despite recent rate rises and a few said equity prices were elevated.

U.S. stock prices were up slightly at the close of trade while yields on U.S. government debt dipped. The dollar was little changed against a basket of currencies.

Last month's 8-1 vote to lift the benchmark interest rate another quarter percentage point, its second this year, signaled the Fed's confidence in a growing U.S. economy and the eventual inflationary effects of low unemployment.

In a press conference at the time, Fed Chair Janet Yellen described a recent decline in inflation as temporary and the central bank kept its forecast of one more rate rise this year and three the next.

Some policymakers since then, however, have shown increasing worry about the Fed's struggle to get inflation back to its 2 percent objective.

The Fed's preferred measure of underlying inflation slipped again in May to 1.4 percent, the Commerce Department reported on Friday, and has run below target for more than five years.

In the minutes, a few policymakers also said the inflation weakness made them less comfortable with the current implied path of rate hikes.

"These participants expressed concern that such a path of increases...might prove inconsistent with a sustained return of inflation," according to the minutes.

"These views suggest that a third rate hike this year remains a solid base case, but also that such a hike is unlikely to come before the December meeting," said Roberto Perli, an economist at Cornerstone Macro.

Balance Sheet Edges Closer

The issue of when to begin reducing the Fed's $4.2 trillion portfolio of Treasury bonds and mortgage-backed securities and how it might affect deciding future rate rises also sparked debate.

At the June meeting, the Fed gave a clear outline of its plan this year to reduce its portfolio but gave no precise timing. The shedding of the bonds and other securities, most of which were purchased in the wake of the 2007-2009 financial crisis, marks the final chapter in the central bank's normalization of monetary policy.

Several Fed officials felt the reduction in the balance sheet and associated policy tightening "was one basis for believing that...the target range for the federal funds rate would follow a less steep path than it otherwise would." Some others, however, said the shedding of bonds should not figure heavily in deciding monetary policy.

Economists largely expect the Fed to begin shrinking its balance sheet at its September meeting before raising rates again at its final meeting of the year in December.

Investors also see the next rate increase occurring in December, according to Fed funds futures data compiled by the CME Group. The rate-setting committee is next scheduled to meet to decide interest rate policy on July 25-26.

Article Link To Reuters: