Tuesday, July 11, 2017

Tuesday, July 11, Morning Global Market Roundup: Asian Shares Rise As Investors Await Yellen Testimony

By Lisa Twaronite 
July 11, 2017

Asian shares extended early gains on Tuesday and the dollar notched a four-month high against the yen, as investors awaited testimony from Federal Reserve Chair Janet Yellen for clues on when the central bank would tighten U.S. monetary policy.

MSCI's broadest index of Asia-Pacific shares outside Japan was up 0.6 percent, with sentiment underpinned by technology-led gains on Wall Street.

Japan's Nikkei stock index rose 0.5 percent, buoyed by a weaker yen, while Australian shares pared some of its earlier losses.

"Except for worries about North Korea, the situation in Asia is calm at the moment, and this is giving some relief to investors," said Kyoya Okazawa, head of global markets, Japan and Korea, at BNP Paribas.

"The dollar has risen above the 114 level, and this is lifting Japanese shares," he said.

China stocks were mixed as blue-chips firmed while small-caps extended falls on expectations of more equity supply. The CSI300 index rose 0.5 percent, but the Shanghai Composite Index shed 0.2 percent.

The dollar index, which tracks the greenback against a basket of six major rivals, added 0.2 percent to 96.163 ahead of Yellen's semi-annual monetary policy testimony before Congress on Wednesday and Thursday.

San Francisco Federal Reserve President John Williams said Tuesday in Sydney that it was a reasonable view to expect one more rate hike this year, and his own view was to start adjusting the central bank's balance sheet in the next few months.

"Normalization of monetary policy in the coming months is almost priced in, and the Fed will start shrinking its balance sheet in September, and this does not necessarily mean a delay of rate hikes," said Masafumi Yamamoto, chief forex strategist at Mizuho Securities in Tokyo.

"This is supporting the dollar as a positive factor, and limiting its downside at the moment," he said. "I think Yellen will confirm that rate hikes are coming, and that balance sheet shrinkage will come."

Against its Japanese counterpart, the dollar added 0.3 percent to 114.43, its highest level since mid-March.

The euro inched 0.1 percent lower on the day to $1.1387.

The Canadian dollar was down slightly against its U.S. counterpart as investors awaited a Bank of Canada interest rate decision on Wednesday.

Forecasters are divided on whether the central bank will raise rates but data from the overnight index swaps market shows that money markets are almost fully priced for an increase, while an 80 percent chance of a second hike has been implied by December.

Crude oil prices extended their overnight gains, even as increased drilling activity in the United States and uncertainty over Libyan and Nigerian production cuts clouded the future supply outlook.

U.S. crude futures rose 0.4 percent to $44.58 a barrel after adding 0.4 percent on Monday, while Brent crude was 0.4 percent higher at $$47.08.

Spot gold edged 0.2 percent lower to $1,212.00 an ounce, moving back toward near four-month lows touched in the previous session.

Article Link To Reuters:

Oil Rises On Firm Short-Term Demand Outlook; Overall Market Still Weak

By Henning Gloystein
July 11, 2017

Oil edged up on Tuesday, lifted by a strong demand outlook for the coming weeks, but overall market conditions remain weak on the back of an ongoing fuel supply overhang, prompting several banks to cut their price forecasts.

Brent crude futures were at $47.01 per barrel, up 13 cents, or 0.3 percent, from their last close.

U.S. West Texas Intermediate (WTI) crude futures were up 10 cents, or 0.2 percent, at $44.50 per barrel.

Traders said the uptick in prices was in part due to healthy demand expected in the coming weeks.

Weekly U.S. gasoline demand data "compares favorably to the five-year average and miles driven also continue to grow year-on-year," said Bank of America Merrill Lynch.

However, beyond the seasonal strength, "U.S. gasoline demand may have peaked in absolute terms last year", it said, adding that there was no structural tightness in sight once the peak demand summer season finishes.

Crude prices are about 18 percent below their 2017 opening levels despite a deal led by the Organization of the Petroleum Exporting Countries (OPEC) to cut production from January.

OPEC along with some other major exporters like Russia agreed to hold back around 1.8 million barrels per day (bpd) of production between January this year and March 2018.

However, an over 10 percent jump since mid-2016 in U.S. production to 9.34 million bpd, as well as rising output from Nigeria and Libya, OPEC-members who were exempt from cutting, have undermined efforts to tighten the market.

OPEC exported 25.92 million bpd in June, 450,000 bpd more than in May and 1.9 million bpd more than a year earlier.

"OPEC has yet to address this increase in production," U.S. bank Goldman Sachs said, but added that there was a chance that OPEC could introduce a deeper output cut in a "shock and awe manner, with little public announcement".

Should no further cuts happen, Goldman said crude prices could fall below $40 per barrel.

BNP Paribas said that "the simple truth is that OPEC and Russia have to contend with the fact that there is output growth elsewhere diluting their efforts at reducing supply."

The French bank therefore said it had made "deep cuts" to its crude price forecasts.

"We now see the price of WTI averaging $49 per barrel 2017 (-$8/barrel revision) and that of Brent $51 per barrel (-$9/barrel revision). We also revise downwards 2018 with WTI averaging $45 per barrel (-$16 per barrel) and Brent $48 per barrel (-$15/barrel revision)," BNP said.

Britain's Barclays bank said on Tuesday that it had cut its average 2017 and 2018 Brent price forecasts to $52 per barrel for both years from $55 and $57 per barrel respectively.

Article Link To Reuters:

Oil Up? Oil Down? Blame The Algorithms

As market moves confound analysts and longtime investors, many are pointing fingers at the rise of automated trading and algorithms.

By Stephanie Yang and Timothy Puko
The Wall Street Journal
July 11, 2017

When energy analysts and investors couldn’t figure out oil markets this year, they blamed one group: algorithmic traders.

On various days over the first six months of 2017, even amid signs of tightening supply, oil prices fell sharply, eventually sinking into bear market territory.

Such moves confounded longtime watchers of oil, who said that based on the fundamental information, prices should have been rising.

Oil investors, who make bets relying on data like production and demand, say that such forces are no longer always driving crude prices. They say program trading is distorting the market, often causing shallow price drops to accelerate.

Take May 25. Even after the Organization of the Petroleum Exporting Countries agreed to continue cutting back supply, oil fell almost 5%.

While some observers attributed the move to investor expectations for even deeper cuts from OPEC, others said the drop steepened as algorithms hopped on the trend. To oil investors geared to fundamentals, it was an example of how the use of algorithms based on technical trading signs has been influencing commodities like never before.

Saudi Arabia energy minister Khalid al-Falih was among those who pointed to technical trading for causing the May 25 selloff to intensify. “For many people, it was time to sell,” he said in an interview after the May 25 OPEC meeting. “Once you broke some of the technical barriers,” that also had an impact, he said.

Although automated trading has swept stock and bond markets for years, it has only recently accounted for the majority of trades in energy.

Automated trading in energy-related contracts accounted for 58% of volume from late 2014 to late 2016, compared with 47% in the preceding two-year period, a March study by the Commodity Futures Trading Commission shows.

Weekly data releases on U.S. crude storage are still a significant factor in market movement, but price swings have been magnified by programmed trading, analysts say.

On March 8 and 9, analysts say algorithms kicked in after data showed record-high inventory levels. Oil slid that day below $50 a barrel for the first time this year.

“An increasing number of market participants are being swayed more by the headlines than by counting physical barrels,” said Michael Tran, director of energy strategy at RBC Capital Markets. “A lot of this has been driven by algos and quants.”

Strategies vary greatly among funds, making the impact of algorithms and automation difficult to quantify. The complexity of algorithms also make them an easy target for blame, said Michael Pomada, chief executive of Crabel Capital Management, a hedge fund with $2.2 billion in assets and $700 million in trend-following strategies.

“It’s like the boogeyman,” said Mr. Pomada. “People tend to blame things that they don’t know much about.”

Algorithms often have intricate and opaque methodology. They tend to follow set rules on when to buy and sell, using signals such as moving averages and volatility to identify trends.

But traders may combine mathematical models and human discretion to place bets on price moves ranging from within one day to several months.

Although both human traders and algorithms use automation to execute orders, the rising level of automated trades is one benchmark that reflects the growing influence and speed of computers in oil trading.

Computerized trading is also taking over other commodities. According to the CFTC report, the share of automated trading in agriculture rose to 49% for a two-year period ending in late 2016, from 38% in the preceding two years, and to 54% from 47% in metals for the same periods.

But crude has been particularly vulnerable to big swings this year as traders try to gauge the impact of OPEC cuts amid a global oil gut. Meanwhile, momentum traders who use algorithms have grasped for market trends, said Peter Hahn, of Bridgeton Research Group, a quantitative research firm.

Oil is “in a transitioning period,” Mr. Hahn said. In that kind of market, he said, “momentum-based algorithms are more likely to be whipped into and out of long and short positions.”

Money is also pouring into some algorithmic strategies. In 2016, investors pumped $25.5 billion of new money into commodity trading advisors, or CTAs—many of which use algorithms to follow trends in the futures market—according to data provider Preqin. CTAs attracted another $7.2 billion of new investor cash in the first quarter of this year, bringing the funds’ total assets to $256 billion.

Funds that use trend-following strategies say it is unlikely their models have been disrupting the market. Traditional funds that don’t specialize in systematic trading or commodities can also be trend followers.

“There can be a lot of momentum players out there of all different types,“ said Christopher Reeve, director of product management at Aspect Capital, a CTA that uses trend-following strategies and manages more than $6 billion. “We would see very quickly if we were having too high of a market impact.”

Goldman Sachs said CTAs can create trading opportunities. “Fundamental traders shouldn’t be afraid of the CTAs, but rather view them as creating opportunities when they push markets away from fundamentals,” the firm wrote in a commodities research report from June 29.

Even traders that take positions based on fundamental signs are building models to predict how trend followers can move oil, said Anthony Caruso, head of quantitative and macro strategies at Mesirow Advanced Strategies, a fund of hedge funds.

“They know that trend followers are kind of the elephant in the room,” he said.

Article Link To The WSJ;

A Russia Sanctions Trap

A Senate provision could hurt U.S. oil firms working outside Russia.

By The Editorial Board
The Wall Street Journal
July 11, 2017

Congress wants to increase sanctions on Russia for meddling in the 2016 election, and please go for it. But the bill that recently passed the Senate 98-2 contains a hastily written provision that could boomerang on U.S. interests, and the House can fix the potential damage.

The problem is a provision that expands restrictions on how U.S. energy firms can interact with Russian counterparts. U.S. companies are already prohibited from investing in or advising on oil and gas projects in Russia. But the bill would also bar them from taking part in any project anywhere with sanctioned Russian firms. In practice this could bar U.S. companies from some of the biggest deepwater drilling projects around the world and thus help Russia and China.

At issue is a quirk of the oil and gas industry known as “unitization”—a technical term for operating efficiency. Governments (say, Brazil) will grant leases to many industry players for different blocks of the same oil field. While the leases are stand-alone deals, the host government will nonetheless require all players to jointly create the infrastructure (pipelines, etc.) to efficiently develop the field.

Under the Senate language, U.S. companies would be barred from any project where sanctioned Russian firms were also granted exploration rights. Those blocks would instead be snapped up by European or Chinese firms that aren’t bound by similar restrictions. Russia could even exploit the rules to hurt U.S. companies by bidding on projects solely to drive American energy firms out of deals.

Richard Sawaya, vice president of the National Foreign Trade Council, estimates that the Senate provision could bar U.S. oil and gas firms from some $100 billion in exploration projects over 10 years—with commensurate damage to American jobs, shareholders and tax revenue. The provision might even help Russian companies get much of that business.

The oil and gas industry supports the overall sanctions bill but wants to correct the boomerang provision. Texas Rep. Pete Sessions may be able to force some changes as head of the House Rules Committee, but he could use a hand from the Trump Administration. Secretary of State Rex Tillerson may be reticent given his former Exxon ties, but this bill should transcend political appearances.

The White House dislikes the sanctions bill because it limits President Trump’s discretion to lift sanctions without Congressional approval. So it may be staying silent in hopes that the oil provision takes down the entire bill in the House. Republicans who want to act against Russia shouldn’t let that happen.

Mr. Trump wants to unleash U.S. oil and gas production, which properly deployed can undercut Vladimir Putin’s petro-dollar revenue at home and his political leverage over European energy markets. It makes no sense to kneecap U.S. energy production in the rest of the world in a bill aimed at sanctioning Russia.

Article Link To The WSJ:

Preventing The Rise Of ISIS 2.0

A dirty word: "nation-building."

July 11, 2017

On Sunday, Iraqi Prime Minister Haider al-Abadi traveled to Mosul to claim victory in the battle against ISIS. A few ISIS die-hards remain holed up in Mosul, but he is surely right that the battle over this city, which began nine months ago and has lasted longer than the Battle of Stalingrad during World War II, is more or less finished. (Stalingrad: 200 days. Mosul: 266 days, as of Sunday.)

Seeing the pictures of what Mosul looks like now reminded me of a trip to Ramadi that I took in 2007, almost exactly a decade ago, shortly after its liberation from al-Qaeda in Iraq, the predecessor of the Islamic State of Iraq and Syria. Here is what I wrote: “Buildings are either entirely destroyed or badly damaged. Twisted girders jut into the sky. Piles of rubble are everywhere. Water sits in the streets; the water mains have been broken by countless explosions of buried IEDs. There are crater holes from roadside bombs every few feet.”

I was nevertheless optimistic about the outcome in Anbar Province, of which Ramadi is the capital, because simply wresting control of major population centers from al-Qaeda was a major accomplishment that seemed impossible to contemplate even a year earlier. In hindsight, my optimism was misplaced. Not because “the surge” wasn’t successful: it was. What I could not have predicted was that Barack Obama would win the presidency and pull all U.S. troops out of Iraq in 2011, thus creating a power vacuum that allowed AQI to rise from the ashes.

That is a lesson worth keeping in mind today, when ISIS, the latest incarnation of AQI, appears to be on the ropes not only in Iraq but in Syria. Rumors of the organization’s demise have been exaggerated before and, sadly, may be exaggerated today. It has shown the staying power of a particularly virulent form of cancer.

A report from West Point’s Combatting Terrorism Center looked at what happened in 16 Iraqi and Syrian cities that were previously liberated from ISIS control. “From each city’s date of liberation from the Islamic State until April 2017,” the authors find, “the Islamic State reported that it carried out 1,468 separate attacks in these 16 cities.” That’s a lot of attacks for a group that has supposedly been defeated!

What the West Point report suggests is that ISIS will now focus not on controlling territory but, rather, on undertaking terrorist attacks—and not only in Iraq and Syria. To show its continuing relevance, ISIS may now feel more compelled than ever to pull off spectacular terrorist operations in the West. As the New York Times notes, “the Islamic State has partly compensated for its losses at home by encouraging affiliates abroad—in Libya, Egypt, Yemen, Afghanistan, Nigeria and the Philippines—and by activating operatives elsewhere.”

Combatting ISIS operatives abroad will require the usual mix of security and intelligence operations combined with attempts to counter its malign influence in the battle of ideas—to prevent the radicalization of more Western youth. But to prevent ISIS—or another radical Sunni group, such as al-Qaeda’s Syria affiliate, formerly known as the Al Nusra Front—from rising again in Syria and Iraq it will be necessary to prevent those countries from falling under the grip of Shiite extremists.

That may sound paradoxical, given that radical Sunnis and Shiites slaughter each other, but it’s true that extremists of both sects feed off each other. The existence of one justifies the existence of the other. That is why a key part of the surge’s success in 2007-2008 were the steps that General David Petraeus and Ambassador Ryan Crocker took to strong arm then-Prime Minister Nouri al-Maliki into reaching out to Sunnis and blunting the threat from Shiite extremists. Unfortunately, after the U.S. departure in 2011, we lost any leverage over Maliki, and the result was that he pursued a sectarian agenda that pushed many Sunnis into the arms of a resurgent ISIS.

The battle of Mosul has been hard enough. It will be harder still to prevent this cycle of radicalization from occurring again. Haider al-Abadi is more moderate than Maliki, but Shiite extremists backed by Iran continue to exercise a disproportionate influence in Baghdad. There is every reason to fear that an incompetent, sectarian central government will neglect—or, even worse, oppress—Sunni areas as soon as they have been cleared of ISIS control. Unless Baghdad makes a significant effort to rebuild battered cities like Mosul and to give their representatives a significant say in policymaking, Sunni grievances will fester again, providing a perfect petri dish for the rise of ISIS 2.0.

It will not be easy to avoid such an outcome, and it will require a significant U.S. presence in Iraq going forward. That means not only a diplomatic, intelligence, and political presence but also a military presence. Without having significant forces on the ground it will be hard to counter the Iranian-backed militias known as the Popular Mobilization Forces. The U.S. will need to champion Sunnis’ legitimate rights and assure them that they will not once again be at the mercy of Shiite ethnic cleansing squads.

And that, in turn, will require the U.S. government to embrace nation-building—a term even more neuralgic for Donald Trump than it was for Barack Obama. Will Trump put aside his campaign rhetoric and commit the U.S. to an active role in Iraq—and Syria—for years going forward? Who can say? But that is what it will take to truly defeat ISIS.

Article Link To Commentary:

Iran Poised To Gain As ISIS Falls In Mosul

Iraq declares victory in the country’s second-largest city, as Tehran seeks to extend influence.

By Maria Abi-Habib and Asa Fitch
The Wall Street Journal
July 11, 2017

Iraq’s U.S.-backed prime minister declared victory over Islamic State in Mosul on Monday, but Iran is shaping up to be one of the biggest winners in the struggle with Washington for influence in Baghdad and across the region.

Nouri al-Maliki, a former Iraqi prime minister supported by Iran, is campaigning to win back his old job in next year’s Iraqi election against Haider al-Abadi, the incumbent favored by Washington.

Mr. Maliki has given much of the credit for the Mosul victory to an umbrella group of mostly Shiite militias, many supported by Iran, that he formed in 2014, just before his ouster as premier. The election could determine whether the country tilts toward Iran or the U.S.

Islamic State’s losses in Mosul also are expected to make it easier for Shiite-majority Iran to ship weapons through northern Iraq and neighboring Syria to the Hezbollah militia Iran supports in Lebanon. Authorities in Tehran have been quick to hail the battle against the Sunni extremists in Mosul as a triumph for them and their regional allies.

“Today the resistance highway starts in Tehran and passes through Mosul and Beirut to the Mediterranean,” Ali Akbar Velayati, a top adviser to Iran’s Supreme Leader, said last week as he welcomed Islamic State’s defeat in Mosul.

On Monday, Mr. Abadi declared victory over Islamic State in Mosul, formally ending a nearly nine-month battle to win back Iraq’s second-largest city, which the extremists captured three years ago.

But Mr. Abadi said Iraq still had to restore stability and eliminate sleeper cells, and the commander of the U.S.-led coalition fighting Islamic State, Lt. Gen. Stephen Townsend, pointed to tough battles ahead to eliminate Islamic State.

For Iran and Hezbollah, Islamic State’s rise to power in 2014 became one of the biggest challenges to the alliance’s regional influence, erecting a state along the Iraqi-Syrian border that broke the weapons pipeline from Tehran to Beirut and challenged Tehran’s allies in Damascus. Iran has also shipped weapons to Hezbollah by using Iraqi airspace to fly equipment into Damascus, a less efficient route, according to Western and U.S. officials.

Now Islamic State’s empire has been reduced to patchy zones of control, allowing Iran to slowly regain its arc of influence stretching from Tehran through Baghdad to Damascus and Beirut.

Tehran has longstanding cultural and political ties with Iraq, the only Arab country with a Shiite majority.

Although U.S. forces and the Shiite militias maintain an uneasy truce in Iraq, the militias have sought to check U.S. forces across the border in Syria, advancing on an American special forces base in the south. Washington responded by launching airstrikes on the Iraqi militias, turning southern Syria into a flashpoint for American confrontation with Iran in the Mideast.

On Monday, Gen. Qassem Soleimani, the head of Iran’s powerful Islamic Revolutionary Guard Corps, welcomed the victory in Mosul and taunted the U.S. for its waxing and waning support for Baghdad over the years.

“The Islamic Republic [of Iran] wasn’t like other countries that closed weapon contracts with Iraq after receiving Iraq’s money but refused to give support to Iraq when it’s urgent,” Gen. Soleimani said.

Mr. Maliki—a favorite of Iran—was blamed just a few years ago by the U.S. for stoking sectarian tensions that led to the rise of Islamic State in 2014. Washington supported Mr. Abadi to replace him, and Mr. Maliki was pushed out of office that September.

Now Mr. Maliki is emerging as Mr. Abadi’s biggest competitor in what is expected to be a tight race that could determine whether the U.S.-backed fight against Islamic State translates into lasting American influence in the country.

Iran officially backs Mr. Abadi, but the relationship could fray once a figure who can unite Iraqi security forces against Islamic State is less crucial. Mr. Abadi has been more resistant to Iranian influence than other Shiite leaders, wary of being cast as an Iranian puppet.

On Sunday, with Mosul’s last battles still raging, Mr. Abadi flew to the city to declare victory. But Mr. Maliki had already issued a congratulatory statement last week.

Instead of congratulating Mr. Abadi’s government, Mr. Maliki praised Iraqi security forces and the Hashed al-Shaabi, or Popular Mobilization Forces, the umbrella group of mostly Shiite militias that Mr. Maliki formed in 2014. Iran trained many of those militias a decade ago to fight U.S. troops after the 2003 invasion of Iraq.

Earlier this year, Mr. Maliki boasted that it was he who unified the Shiite militias and deserved the credit for Islamic State’s defeats.

“Had there been no Hashed al-Shaabi, Baghdad would have fallen to terrorists,” he said.

The heated jockeying for power between Iran and the U.S. in Iraq comes as the government in neighboring Syria, bolstered by Iran and Hezbollah, is on the verge of victory after more than six years of war. That would strengthen the Shiite alliance that runs from Iran to Syria and Lebanon, incorporating the powerful militias in Iraq.

In Iraq, Iran’s biggest military and social tool is the Shiite militias, which have outlasted various governments in Baghdad and had numerous past confrontations with the U.S. military.

But Mr. Abadi sidelined them in the battle for Mosul, which was instead spearheaded by the country’s military and police with help from U.S. special forces. This was done out of concern that a bigger role for the militias would only deepen sectarian strains, as Mosul is a predominantly Sunni city. But in many of the other battles across Iraq, the militias have been instrumental to defeating Islamic State.

“Iran is being very clever with the way it deals with Iraq,” said Hisham al-Hashemi, an Iraqi researcher who often advises the Iraqi government.

“After Islamic State, Iran doesn’t need to boost its influence here anymore, it’ll be back to full control. The presence of Islamic State for three years in Iraq has limited the influence of Iran’s allies.”

Article Link To The WSJ:

Arab States Seek To Step Up Pressure On Qatar Over 2013 Accord

By Sami Aboudi
July 11, 2017

Four Arab states sought on Monday to pile pressure on Qatar over charges it backs terrorism, saying the publication of a previously secret accord between Riyadh and Doha showed Qatar broke a promise not to meddle in the affairs of Gulf countries.

The text of the 2013 accord, whose existence was known but whose contents have never before been made public, was first published by CNN on Monday and later released on social media by Saudi officials.

In a joint statement, Bahrain, Egypt, Saudi Arabia and the United Arab Emirates said the publication of the accord, meant to settle a dispute between Qatar and its Gulf neighbors, "confirms beyond any doubt Qatar's failure to meet its commitments and its full violation of its pledges".

Amid fresh tension with Qatar, the four slapped sanctions on Doha on June 5, accusing it of supporting terrorism, cozying up to Iran, backing the Muslim Brotherhood - the world's oldest Islamist organization - and interference in their affairs.

The four say Qatar pledged to desist from interfering in its neighbors' politics in the 2013 agreement.

Qatar has rejected the charges and said the four countries are trying to impose their own views on its foreign policies.

The document surfaced as U.S. Secretary of State Rex Tillerson arrived in the region to help Washington's allies hammer out a way out of the crisis.

In response, Qatar accused Saudi Arabia and the UAE of breaking the spirit of the Riyadh agreement and engaging in an "unwarranted and unprecedented attack on Qatar's sovereignty".

The Riyadh accord aimed to enhance cooperation between sovereign Gulf Arab states and avoid interference in their internal affairs, the official Qatar News Agency (QNA) said.

Kuwaiti mediation efforts hit a snag last week when the four Arab states said they were disappointed with Qatar's response to their list of 13 demands.

Muslim Brotherhood 

Qatar said the demands, which included ending support for militant groups, the closure of the Al Jazeera TV channel, shutting down a Turkish military base in Qatar and downgrading ties with Iran, were an infringement of its sovereignty.

QNA reported Sheikh Saif Bin Ahmed Al-Thani, director of Qatar's government communications, as saying the 13 demands bore no relation to the Riyadh accord and the latest crisis was the result of a coordinated media campaign against Qatar.

"Some of the allegations and demands of the siege countries have no basis, while others were an unwarranted and unprecedented attack on the sovereignty of the state of Qatar in violation to all international and regional agreements."

The 2013 agreement, reached at a meeting in Riyadh hosted by the then Saudi King Abdullah bin Abdulaziz, was signed by the Emir of Qatar Sheikh Tamim bin Hamad al-Thani and Kuwaiti Emir Sheikh Sabah al-Ahmad al-Jaber al-Sabah, while an implementation mechanism was signed by the six GCC foreign ministers.

In the document, the parties agreed to refrain from backing any "political currents that pose a threat to any member country of the (Gulf Cooperation) Council", and provided for Muslim Brotherhood leaders who are non-GCC citizens to leave the area.

Article Link To Reuters:

How To Squeeze China

Force ruling elites to choose between North Korea and American colleges for their kids.

By William McGurn
The Wall Street Journal
July 11, 2017

If the first Duke of Wellington were alive today, he might advise that the battle for North Korea will be won or lost on Harvard Yard.

Add Stanford, Yale, Dartmouth, Chicago and other top-tier private American universities so popular with China’s “red nobility” i.e., the children and grandchildren of Communist Chinese elites. For if the Trump administration hopes to enlist an unwilling Beijing to check North Korea’s nuclear ambitions, visas for the children of China’s ruling class to attend these universities offer an excellent pressure point.

Beijing has been Pyongyang’s closest ally ever since the Cold War split the peninsula after World War II. According to the Council on Foreign Relations, China provides North Korea with “most of its food and energy.” Though China has warned Kim Jong Un about his nuclear testing (which Mr. Kim has ignored), plainly it fears a free and united Korean peninsula more than a nuclear-armed North.

Revoking visas for Chinese students, of course, would not alone resolve the North Korea problem even if it did force Beijing to act. But Beijing could make life for North Korea difficult if it chose to.

Thus far most talk about U.S. options regarding North Korea has focused on economic sanctions or military action against the Pyongyang regime. The dilemma is that every meaningful option comes with big risks, including the devastation of Seoul, retaliation against U.S. troops and more suffering for innocent North Koreans. The advantage of starting with student visas is twofold: The unintended harm done would be more limited than any military strike, and visas are likely a more effective lever than sanctions.

Today 328,547 Chinese students attend American universities, according to the Institute for International Education. The Chinese represent the largest group of foreign students in America.

How many of these students are children of Chinese leaders is unclear. American universities are disinclined to provide this information. In addition, the children of Chinese government officials sometimes attend U.S. universities under assumed names.

The Chinese taste for prestigious American universities goes right to the top. Although President Xi Jinping rails against the corruption of Western values, his daughter went to Harvard, which Mr. Xi managed to swing on an official annual salary of roughly $20,000. A few years back, the Washington Post noted that of the nine members of the standing committee of China’s Politburo, at least five had children or grandchildren studying in the U.S. There are many, many more.

Officially, of course, China is an egalitarian society. In reality, hereditary favors, which now include access to top U.S. universities, are a fixed perk of Communist Chinese culture.

Put it this way: If China’s ruling elite were forced to choose between supporting North Korea and their children’s access to American universities, is it all that hard to see where they would come down? This might be especially true if we continued to allow ordinary Chinese citizens with no family connections to the party or government to come study here.

Would China retaliate? Probably. Would our universities scream? Without doubt. Would there be unfairness? Absolutely.

But if the U.S. does not act quickly, a despot who executes people with antiaircraft guns will soon have the capability to strike Seattle or Chicago with a nuclear-tipped intercontinental ballistic missile. A White House unwilling to consider Chinese student visas as leverage to prevent this would signal Pyongyang and Beijing alike that America is not serious.

U.S. visas are the one thing we know people want. Before Ray Mabus served as Barack Obama’s secretary of the Navy, he was Bill Clinton’s ambassador to Saudi Arabia. There he championed the cause of two American women who had been kidnapped as children and taken to Saudi Arabia by their father, after he’d been divorced in the U.S. by his American wife.

To make the pressure real, Ambassador Mabus cut off all American visas for the father and his Saudi relatives. That got their attention. Unfortunately the deal for the girls’ freedom collapsed after Mr. Mabus left Riyadh and his successor lifted the hold on the visas.

China is even more vulnerable to such pressure. Perry Link, a China scholar at the University of California, notes that the family connections that lie just below the surface in Chinese Communist culture are more powerful than outsiders realize. He likens it to the Mafia.

Imposing sanctions on the offspring of China’s rulers “might raise howls in the U.S. but would be perfectly normal and rational—unexceptional—inside the culture of the people we would be sanctioning,” says Mr. Link. “They would ‘get it,’ and the pinch would be felt.

“Whether or not it would be enough to budge them from their 30-year-old position on North Korea is a different question. But I support making the try.”

Article Link To The WSJ:

China’s Not Even Close To Replacing America As The World’s Leader

By Rich Lowry
The New York Post
July 11, 2017

The world has had its delusions about China over the years, but none quite as fantastical as the notion of Beijing assuming the mantle of global leadership.

Ever since Donald Trump’s election, it has been a journalistic trope to speculate that China is about to take the lead on globalization, climate change and international diplomacy.

A Washington Post headline mused late last year, “If the US withdraws, China wonders whether it is ready to lead the world.” According to The New York Times, “China Poised to Take Lead on Climate After Trump’s Move to Undo Policies.” On the occasion of last week’s G-20 summit, Bloomberg reported, “China, Germany Step Up as US Retires From World Leadership.”

The Economist a little while ago dubbed China “the global grownup.” Really? The one-party state that tortures and jails dissidents and maintains a dangerous rogue state in its hip pocket, North Korea, for strategic leverage?

Knowing his audience, President Xi Jinping has stoked this tripe by mouthing all the right cliches in front of the right audiences. He gave a speech at Davos heavy on the theme of openness and promised to help lead globalization. “Any attempt to cut off the flow of capital, technologies, products, industries and people between economies,” Xi said, summoning his best Thomas Friedman, “is simply not possible.”

Somehow, China manages the impossible nonetheless. When it comes to information (which Xi omitted from his litany), China cuts itself off from the rest of the world quite adeptly. According to the pro-democracy group Freedom House, China ranks last in the world in Internet freedom, behind Iran and Syria. It blocks Google, YouTube, Facebook and Twitter, and jails people for spreading rumors online, i.e., criticizing government officials.

How about the free flow of capital? China has tight rules against capital outflows. Technology? China is expert at stealing it, especially from foreign companies operating in China. Products? Despite its membership in the WTO, China is robustly mercantilist.

Brad Setser of the Council on Foreign Relations points out that manufacturing imports as a share of the Chinese economy peaked in 2003 and have been falling since. As a practical matter, what Xi calls “win-win cooperation” is the rest of the world opening its markets to China while China refuses to reciprocate.

Xi also toes the Davos line on climate change, to the delight of credulous Westerners. China’s leadership consists of making a pledge as part of the Paris accords to reach peak emissions in 2030 — a goal consistent with the trajectory of its economy anyway — and planning to make a mint by selling to the West green technology it has developed through its characteristic unscrupulous means.

There is no doubt that China, the world’s second-largest economy, is much more assertive on the international stage than it used to be, but the idea of it as a global leader, or as a responsible power, or even as an admirable country is daft.

It is a systematic abuser of human rights. “The outlook for fundamental human rights, including freedoms of expression, assembly, association and religion, remains dire,” according to Human Rights Watch.

It props up the lunatic regime in North Korea because it fears the prospect of a unified, democratic Korea. It is pushing for control of the South China Sea, ignoring a sweeping ruling by an international tribunal against its claims of sovereignty. It is investing massively in its military — and not to support the cause of global openness.

Clearly, one motive for the dewy-eyed coverage of China’s purported leadership is a distaste for President Trump, who wears his disregard for the global elite on his sleeve. The romance with Xi is a way to tweak him.

But, whatever his views on trade or climate change, Trump doesn’t run a repressive one-party state. It’s perverse to be more comfortable with president who bans Twitter over the president who uses it indiscriminately.

Article Link To The NY Post:

Post-Brexit U.K. Trade Deal With Trump Is Easier Said Than Done

The U.S. president says it can be done "very, very quickly." But economists say, not so fast.

By Jill Ward and Charlotte Ryan
July 11, 2017

The transatlantic trade deal U.S. President Donald Trump is offering U.K. Prime Minister Theresa May will ultimately prove easy to promise and hard to deliver.

That’s the warning of business leaders and trade analysts after Trump told May last week that the post-Brexit accord she hankers after can be lined up "very, very quickly."

The challenge for the U.K. with talks set to begin this month is that America boasts more leverage and negotiating know-how than the U.K. does. That will potentially force May to compromise on areas such as financial regulation and food standards to land the agreement she needs.

“The U.K. must be absolutely desperate to demonstrate that it’s able to get something from the United States,” said Peter Holmes, an economist at the Trade Policy Observatory, a research group. “The U.S. will make demands that even a desperate British government won’t be able to accede to.”

While the U.K. can’t formally sign deals with other countries until it formally leaves the EU in March 2019, it can prepare the groundwork in the hope of ratifying them soon after. Conversations with the U.S. are set to begin on July 24.

At stake is trade between the U.S. and the U.K, which Britain's statistics office estimates amounted to a surplus 37 billion pounds ($47.6 billion) a year as of 2015. By contrast, the U.S. Bureau of Economic Analysis calculated a surplus of $11.9 billion in the same year, providing an awkward starting point, with both countries claiming to export more than they import from each other.

“The U.S.A. has one of the best negotiating teams in the world in terms of trade deals,” Paul Drechsler, president of the Confederation of British Industry, a lobby group, told Sky News. “We don’t want to walk into a bear hug and I would be wary of trying to be too fast. A trade deal is a dog-eat-dog activity; it’s not a diplomatic activity.”

The U.K. may already have a taste of things to come from the inability of the EU and U.S. to agree a trade deal. Those talks have been on hold since Trump took power in January amid differences over data privacy and the rolling back of financial regulations among other issues.

“You’re starting from the same point and the same issues are going to come up,” said Joseph Francois, managing director of the World Trade Institute, a group at the University of Bern.

“There are bigger potential gains from doing a deal with Europe than with the U.K. on its own, just because Europe is a bigger market,” said Thomas Sampson, an economist at the Centre for Economic Performance. “The flip side of that would be that because the U.K. is just one country rather than a block of 27 countries it should have more flexibility.”

The U.K. is already viewing a pact as a way for London-based banks to secure easy access to Wall Street, according to International Trade Secretary Liam Fox. Yet that might require the U.K. to accept weaker rules on finance, less than 10 years after the financial crisis.

Agriculture could also emerge as a sticking point, according to Holmes.

“You can see a Trump administration coming to the U.K. and demanding a loosening of sanitary regulations on food, demanding that the U.K. allow hormone-treated beef to be sold in the U.K. and for the U.K. to accept GM crops,” he said. “There will be quite a reaction against it.”

Another wrinkle could emerge if the U.S. tries to win access for its companies to Britain’s state-run health service. May declined to say in January whether the National Health Service would be off-limits for a trade deal although June’s election may mean she has less room to maneuver on that now.

Still, the effort will be worth it, said Gregor Irwin, chief economist at Global Counsel, a consultancy.

He identified the U.S. as one of the U.K.’s prime targets for striking a deal. He calculated that the total value of U.S. imports expanded faster than those of other major economies between 2010 and 2015 and that although the U.S. has modest average tariff barriers with the U.K., the scale of trade means current barriers are still significant.

Article Link To Bloomberg:

Facebook's Oculus Cuts Price Of Virtual Reality Set, Matching Rival

By David Ingram
July 11, 2017

Oculus, the virtual reality company owned by Facebook Inc, is temporarily cutting the price of its hardware, as the industry tries to figure out why the technology for immersive games and stories has not taken off among consumers.

Oculus is cutting the combined price of its Rift headset and Touch controllers to $399 for six weeks beginning on Monday, said Jason Rubin, Oculus vice president for content. That matches the price of another virtual reality set, PlayStation VR, made by Sony Corp.

Vive, a virtual reality set developed by HTC Corp, is listed for sale at $799 on its website, and it has not recently cut the price.

Facebook paid $3 billion to acquire Oculus and retain its employees in 2014.

Chief Executive Officer Mark Zuckerberg said at the time that the medium, which offers a 360-degree panoramic view through headsets, would "become a part of daily life for billions of people."

That has not happened, although it is unclear if that is because of high prices, something inherent in the technology or some other reason.

Pricing discounts are sometimes a sign of weak product sales. Rubin, though, said in an interview that was not the case with Oculus, which he said could have cut the price sooner but wanted to wait until there were enough games, movies and other entertainment to keep a broad audience busy.

The pace of game releases has quickened, making a wider appeal possible, Rubin said: "We're now in a space where the mass market can be much happier."

Oculus cut its price once before this year, dropping it from $798 to $598 in March.

In May, Oculus shut the doors of its Story Studio, two years after it launched at the Sundance Film Festival, to focus on external content makers.

Another setback was a $500 million legal judgment against Oculus in February, when a jury found in favor of video game publisher ZeniMax Media Inc in a lawsuit accusing Facebook and Oculus of copyright infringement. Oculus has asked for a new trial.

Article Link To Reuters:

Will Bitcoin Tear Itself Apart?

New proposal SegWit2x aims for compromise ahead of Aug. 1; Failure to agree could lead to bitcoin splitting into two.

By Lulu Yilun Chen and Yuji Nakamura
July 11, 2017

It’s time for bitcoin traders to batten down the hatches.

The notoriously volatile cryptocurrency, whose 160 percent surge this year has captivated everyone from Wall Street bankers to Chinese grandmothers, could be headed for one of its most turbulent stretches yet.

Blame the bitcoin civil war. After two years of largely behind-the-scenes bickering, rival factions of computer whizzes who play key roles in bitcoin’s upkeep are poised to adopt two competing software updates at the end of the month. That has raised the possibility that bitcoin will split in two, an unprecedented event that would send shockwaves through the $41 billion market.

While both sides have big incentives to reach a consensus, bitcoin’s lack of a central authority has made compromise difficult. Even professional traders who’ve followed the dispute’s twists and turns aren’t sure how it will all pan out. Their advice: brace for volatility and be ready to act fast once a clear outcome emerges.

“It’s a high-stakes game of chicken,” said Arthur Hayes, a former market maker at Citigroup Inc. who now runs BitMEX, a bitcoin derivatives venue in Hong Kong. “If you’re a trader, there’s a lot of uncertainty as to what happens. Once there’s a definitive signal about what will be done, the price could move very quickly.”

(Detailed summary of key dates and potential outcomes at bottom.)

Behind the conflict is an ideological split about bitcoin’s rightful identity. The community has bitterly argued whether the cryptocurrency should evolve to appeal to mainstream corporations and become more attractive to traditional capital, or fortify its position as a libertarian beacon; whether it should act more as an asset like gold, or as a payment system.

The seeds of the debate were planted years ago: To protect from cyber attacks, bitcoin by design caps the amount of information on its network, called the blockchain. That puts a ceiling on how many transactions it can process -- the so-called block size limit -- just as the currency’s growing popularity is boosting activity. As a result, transaction times and processing fees have soared to record levels this year, curtailing bitcoin’s ability to process payments with the same efficiency as services like Visa Inc.

To address this problem, two main schools of thought emerged. On one side are miners, who deploy costly computers to verify transactions and act as the backbone of the blockchain. They’re proposing a straightforward increase to the block size limit.

On the other is Core, a group of developers instrumental in upholding bitcoin’s bug-proof software. They insist that to ease blockchain’s traffic jam, some of its data must be managed outside the main network. They claim that not only would it reduce congestion, but also allow other projects including smart contracts to be built on top of bitcoin.

But moving data off the blockchain effectively diminishes the influence of miners, the majority of whom are based in China and who have invested millions on giant server farms. Not surprisingly, Core’s proposal, called SegWit, has garnered resistance from miners, the most vocal being Wu Jihan, co-founder of the world’s largest mining organization Antpool.

“SegWit is itself a great technology, but the reason it hasn’t taken off is because its interest doesn’t align with miners,” Wu said.

Still, after previous counter-proposals championed by Wu fell through, miners last month agreed to compromise and support SegWit, in exchange for increasing the block size. Wu says the plan will alleviate short-to-medium term congestion and give Core enough time to flesh out a long-term solution. That proposal is what is known as SegWit2x, which implements SegWit and doubles the block size limit.

“You can think of the SegWit2x proposal as an olive branch,” said Wu.

Support for SegWit2x has reached levels unseen for previous solutions. About 85 percent of miners have signaled they are willing to run the software once it’s released on July 21, and some of bitcoin’s largest companies have also jumped on board.

The unprecedented level of endorsement is partly prompted by anxiety of bitcoin losing its dominant status to ethereum, a newer cryptocurrency whose popularity has soared thanks to its ability to run smart contracts and its more corporate-friendly approach.

Still, hardliners say that after more than two years of bitter arguments, a split would let people part ways to explore different visions, even if prices crash.

Some of Core supporters are pushing a separate agenda called UASF (user activated soft fork). Starting from Aug. 1, it will reject transactions not compliant with SegWit. If a majority of miners do not adopt SegWit by then, two versions of bitcoin would come into existence, triggering a currency split.

“It’s moderates versus extremists,” said Atlanta-based Stephen Pair, chief executive officer of BitPay, one of the world’s largest bitcoin wallets. “It depends on how much a person values the majority of people staying on one chain at least for a little while longer, versus splitting and allowing each pursuing their own vision for scaling.”

Many Core developers continue to reject SegWit2x because they see its development and implementation as being too rushed, which they say could undermine the software underpinning bitcoin.

“To suggest a hard fork happen significantly faster than even the most minor of changes in recent history is irresponsible and dangerous,” said Matt Corallo, a Core contributor and former co-founder of Blockstream, which stands to benefit from SegWit.

Below is an outline of the main events that could unify or divide bitcoin:

-- By July 21: SegWit2x software is released and supporters begin using it.

-- July 21 to July 31: The community monitors how many miners deploy SegWit2x:
    - If more than 80 percent deploy it consistently, that should signal community-wide adoption of    SegWit and the avoidance of a split, at least for now.
    - But if a majority do not deploy, expect anxiety within the community to grow as the focus shifts  to the Aug. 1 deadline.
-- Aug. 1: UASF is deployed by its supporters, who begin checking if bitcoin transactions are compliant with SegWit.
   - If a majority of miners still do not deploy SegWit2x or otherwise accept SegWit, and if UASF 
supporters do not back down, then two versions of bitcoin’s blockchain could come into existence: a UASF-backed one where only SegWit transactions are recognized, and another where all trades - SegWit and non-SegWit -- are recognized.
   - If a split occurs, bitcoin will likely begin existing on both blockchains in parallel, resulting in two versions of the cryptocurrency. Expect traders to quickly re-price the value of both, likely leading to massive volatility.

Article Link To Bloomberg:

Amazon Takes Away Power Of Brand Names, Throwing Another Industry Into Turmoil

Consumer packaged-goods companies are cutting back on marketing, signaling complacency, analyst says.

By Caitlin Huston
July 11, 2017

Big brands may have given into the power of Amazon.com Inc.

Consumers influenced by Amazon’s approach are shopping based on price rather than the brand name, which is causing them to avoid physical stores, said James Cakmak, an analyst at Monness, Crespi, Hardt. While Amazon’s effect on physical retail stores is well-chronicled, Cakmak says that the major brands that are sold in those stores are now dealing with the results as well.

As Amazon AMZN, +1.81% and Wal-Mart Stores Inc. WMT, -2.79% make bigger pushes into the packaged-goods categories, brand names are spending less on marketing and backing away from their original models, Cakmak wrote in a Monday note. The $800 billion consumer packaged-goods category includes name-brand detergents, foods and personal care items, with large companies such as PepsiCo Inc. PEP, -1.07% Johnson & JNJ, -0.75% and Mondelez International Inc.MDLZ, -0.39%

“We see these companies starting to give up, and that’s a bad thing for the industry, consumers and the country,” Cakmak said in the note.

In the past, these companies were able to dominate their sector by controlling how the goods were distributed and placed on the shelf at retail stores. With prime presentation in stores, the companies would spend heavily on marketing, which made up 20% to 25% of their budgets, to influence consumers’ buying decisions.

Now, instead of fighting for shelf space, Cakmak says the companies appear to be scaling back spending. In his quarterly check with major advertising agencies, he found that consumer packaged-goods companies were spending less on marketing. More worrying were reports that these companies were more focused on protecting the bottom line, rather than investing in growth and new innovative strategies to combat the online models.

“We don’t know where the bottom is, but it’s not looking good,” Cakmak wrote.

For example, according to The Wall Street Journal, consumer brands such as NestlĂ© SA NESN, +1.28% and General Mills Inc. GIS, -0.43% have been “soul-searching,” as NestlĂ© has been looking to sell its U.S. confectionery business and General Mills executives acknowledged that they had been late to recent food trends.

PepsiCo Inc. beat its first-quarter earnings expectations, as it pivoted more toward its diet snacks and sodas, but said it came amid “challenging food and beverage industry trading conditions in North America.”

Overall, consumer packaged-goods spending is expected to be flat this year, Cakmak said, citing his checks with the ad agencies.

Cakmak sees Amazon leading this change as it increases its push into food and other goods, with its own private label brands and its recent bid for Whole Foods Market Inc. WFM, -0.36% Wal-Mart is also playing a part, as it has shifted more into e-commerce with its acquisition of Jet.com in August 2016 and its discounts for online orders.

Combined, the two retail giants are making the consumer packaged-goods sector a commodity-driven sector, rather than a brand-focused one.

“Now it’s all about price, especially as Amazon and Wal-Mart fight on a race to the bottom,” Cakmak wrote.

Shares of Amazon have gained 9.2% in the past three months, compared with the S&P 500 index’s SPX, +0.09% gain of 3%.

Article Link To MarketWatch:

Two Catalysts That Could Trigger A Stock Market Correction

-- Stocks have gone for a long period without a major sell-off and are vulnerable.
-- JPMorgan strategists point to the potential for earnings to miss expectations in the second half of the year, after a strong first half.
-- Citigroup strategists say rising interest rates could be a negative for stocks.

By Patti Domm 
July 11, 2017

Stocks have sailed along for a year and a half without a significant correction, but analysts see increasing signs of trouble ahead.

Global strategists from Citigroup and JPMorgan both fired off warnings Monday about events that could affect the rally in equities. Citigroup pointed to rising rates as a threat, and JPMorgan analysts said they are concerned second-half earnings may not be as robust as the market is anticipating.

Stock prices continue to rise despite concerns about lofty valuations. The S&P 500's price-earnings ratio is 17.5 times forward 12 months earnings.

"I find it hard to put money to work here," said Thomas Lee, co-founder of Fundstrat. With major banks kicking off second-quarter earnings reports at the end of the week, Lee says earnings will be the "acid test" for stocks. While this quarter should be fine, he said there are doubts about how strong profits will be later in the year, despite high expectations.

The S&P 500 has only seen two days of a 1 percent or greater decline this year – March 21 and May 17. The index was down 6 percent over a three-week period around the Brexit vote in June 2016, but it hasn't fallen more than 10 percent since the 14 percent correction that began in late 2015 and ended in February 2016. Year to date, the S&P is up 8.4 percent.

In the past two weeks, sovereign yields have risen amid a seeming sea change in thinking about global central banks and interest rate direction, which started with hawkish comments from European Central Bank President Mario Draghi. The U.S. 10-year has followed the lead of the German bund, and rates have gone from about 2.12 percent on June 26 to 2.37 percent. The Fed also has sounded hawkish, emphasizing that it is on track to both slow down bond buying and raise interest rates before the end of the year.

"Rising bond yields have started to worry investors with signs of increased volatility across a number of risk assets and emerging markets. Recent data have shown outflows from U.S. and European equities as well as from EM bond funds and reduced inflows to EM equities," Citi strategists wrote. But they also noted that earnings remain strong enough to support stocks for now.

Citi said the stock market could be at risk if there is a global economic slowdown coupled with softer earnings. Citi strategists also note that "monetary tightening could be a threat if central banks are perceived to have got ahead of the curve." The strategists also said it would be negative for investor confidence if central banks perceive they need to tighten policy because of asset price inflation.

"For now, however, the team believes that there is sufficient earnings momentum to warrant further gains in equity markets, particularly in Europe and Japan. With return expectations in other asset classes still at multi-year lows, it is hard to see major rotation out of equities into defensive assets just yet," they wrote. "The bull market in equities looks a bit old and tired, but it is not yet dead."

Global strategists at JPMorgan raised the flag on earnings, but pointed out that the second quarter should be strong. "We note that in the US, the negative to positive earnings pre-announcement ratio is down to 1.9x, its lowest level in six years," they wrote.

S&P 500 earnings are expected to be up 7.9 percent in the second quarter, following a 15 percent gain in first-quarter earnings, according to Thomson Reuters. The analysts said the first quarter benefited because the period a year ago was when the earnings recession in 2015 and 2016 troughed. They said the second quarter of 2016 was the last quarter of negative earnings growth and should make for easy comparison for this earnings season.

"[Second half] is where the problems could materialize in earnest," they wrote. The strategists said there are three factors to consider about the rest of the year. One is that expectations for second-half growth are elevated, and the comparisons to last year will be more difficult than in the first half. In the U.S., the strategists noted that consensus estimates are for earnings growth of 7 to 8 percent in the third quarter, when excluding commodities and 12 to 15 percent in the fourth quarter.

Secondly, pricing could be weaker in the second half, and global producer price inflation is signaling a slowing in second-half earnings growth. The third issue could be economic growth with the potential for slower China momentum and some mixed U.S. data.

Price-earnings ratios are vulnerable to a slowdown in earnings growth. But they also are vulnerable to rising yields, the strategists note. According to their report, world price to earnings is 26 percent more expensive than it was ahead of the Fed's tapering of quantitative easing in 2013.

The JPMorgan strategists warned in May about the potential for an equities consolidation and they recommended some profit-taking at the time.

"Interestingly, while EPS estimates have been lowered for Q2 and Q3 in the US, they have been raised for Q4. As a result, FY'17 forecasts have become more reliant on the delivery of Q4 earnings," they wrote.

Article Link To CNBC:

Republican Steamrolling Should Terrify Wall Street

Interest groups usually have a role in the legislative process. Not this time.

By Jonathan Bernstein
The Bloomberg View
July 11, 2017

No matter which way the Republican health care bill goes, there's one group that should be seriously freaking out right now: Wall Street. Not because of what the bill says, but because of how Republicans are going about passing it.

For organized interest groups, even those usually happy with Republicans -- whether it's banking or small business or manufacturing -- Republicans have raised red flag after red flag during the health care push. They wrote both the House and Senate versions of the bill in their leadership offices. In the House, the bill received only very brief pro forma committee votes; in the Senate, it didn't even get that. And they didn't hold a series of hearings leading up to the bill, either in this Congress or by Republican-majority chambers in previous Congresses.

Now, it's not unusual for leaders to extensively rewrite a final version of a bill and it's not unprecedented for a bill to go straight from passing one house of Congress to the floor of the other (Obamacare, for example, was rewritten in then-Majority Leader Harry Reid's office). But a major bill has never completely skipped over serious consideration by the committees.1

That matters because the committee process is how organized groups with a recognized stake in the outcome in some policy area -- what scholars sometimes call "issue networks" -- get a chance to make a case for what they care about. So for example the House Financial Services Committee held a hearing on the Volcker Rule this spring prior to concluding work on a reform bill, and invited both opponents and defenders of that measure. That hardly guarantees wins for all groups, nor does it guarantee that every possible group gets included in the process. But for those groups that are included, the process is a solid safeguard against their interests being totally steamrolled in the offices of the House speaker or Senate majority leader.2

Of course, even if drafting the bill is a closed process, party leaders can still listen to whatever groups they want. On financial regulation, Republicans right now would likely listen to the concerns of Wall Street whether or not the committee process was used. But the precedent being set on health care could prove devastating in the future. If outside groups can be shut out here, they can be shut out anywhere, and that will tend to happen more often if it succeeds as a political strategy.

There's also very little evidence that the Republican health care plan will work in the real world as described, and in fact not very much evidence that Republicans care. Their overwhelming goal, as far as anyone can tell, is to pass something that they can call "repealing and replacing" Obamacare; the goal of a smoothly-functioning health care system just doesn't seem to matter very much to them.

That's not snark. The formulation of public policy in Congress depends on the expertise found in the committees, not in leadership offices. Chairs spend years developing deep familiarity with policy areas, and hire staff with detailed knowledge. Leadership involvement has almost always been about rounding up the votes to get something over the finish line -- in which the finish line is defined as a White House signing ceremony, not successful implementation of the new law.

The U.S. policy-making process is always going to be unusually susceptible to what the political scientist Steven Teles calls "klugeocracy," in which policy tends to be the product of a series of compromises and improvisations, rather than a coherent, well-thought-out whole. The U.S. has always been far less reliant on bureaucracy and the neutral expertise it rewards, and more reliant on constantly renegotiated compromises by politicians. But at least in the 1970s and 1980s politicians in Congress tried to build up their resources add expertise to the system; the House in particular has sought to eliminate it since Newt Gingrich's speakership began in 1995.

And there's another reason the health-care bill should frighten organized groups in general, and Wall Street in particular. Republicans have refused to drop their bill despite how poorly it polls; they've even refused to modify it in order to make it more popular. That might at first seem like good news for financial interests, since it suggests that the party might stand up to populist, anti-bank impulses. But what it really suggests is that parties -- at least the Republican Party now, and perhaps Democrats in the future -- may have either chosen to ignore the normal warning signs that would convince lawmakers to hit the brakes, or are so trapped within partisan information flows that they've become incapable of seeing those warning signs.

If groups normally able to produce alerts for Congress are no longer being heard, that's another problem for Wall Street. It has always been able to say that a proposal wouldn't just punish its targets, but would also harm the economy, and get taken seriously by both parties. Not necessarily believed, of course, but listened to. They may not be able to count on that in the future.

So far, health care is an outlier. The Republican financial regulation bill has had more of a regular committee process, although still far less so than would have been the case 30 or 40 years ago. But if the health care bill passes (and especially if it becomes law and isn't thought to be a disaster), both parties may learn from the experience that shortcuts, end runs, and secrecy are the best path to legislative success. And no industry, no matter how well connected it has been in the regular political system up to this point, would be safe.

Article Link To The Bloomberg View:

The Overhyped Seattle Minimum-Wage Disaster

There are glaring weakness in a new study claiming that increased pay floors hurt low-wage workers.

By Barry Ritholtz
The Bloomberg View
July 11, 2017

A study released last month by the University of Washington on Seattle’s effort to raise the minimum wage to $15 an hour has gotten a lot of attention. So what does the new study tell us?

Less than you might think.

That is the short version; the longer version follows.

Because of other obligations, I only now got around to reading the study. In a nutshell, the study said the increases hurt the low-paid workers who were supposed to benefit.

Although the University of Washington study grabbed all of the headlines, a study on Seattle’s labor market released by Institute for Research on Labor and Employment at the University of California-Berkeley a few days before UofW quietly reached the exact opposite conclusion.

Several of you have asked for my perspectives on this; today’s column will give you an overview. One major caveat is that none of the new reports have been peer reviewed; the data isn’t public. Once released, people who are much better than I am at statistical analysis will provide a better assessment of the methodology and data set. As the Seattle Times observed, once that happens, we should expect “the findings will likely be modified and the headline-grabbing claims will likely be toned down.”

As a reminder, I have my own set of my biases. I have written that low pay has been gamed by corporate employers like Wal-Mart Stores Inc. and McDonald’s Corp., whose employees have to rely of various forms of tax-payer assistance to survive. I am, of course, against subsidizing the labor costs of private industry. If the cost of greasy hamburgers and cheap Chinese imports go up if that subsidy is withdrawn, so be it. I will always take market capitalism over crony capitalism. Thus, my pro-minimum wage biases are hereby revealed.

OK, as for the University of Washington study: It found that “Seattle’s minimum wage increase reduced the total hours worked by Seattle’s low-wage workforce by about 9 percent” while raising “low-wage workers’ wages by only about 3 percent, implying that the costs of this wage hike outweighed its benefits for these workers.” The net loss to workers was an average of $125 a month.

Perhaps most noteworthy is that this study is at odds with most of the research on minimum wages. Modest, gradual increases have not been shown to reduce employment jobs or hours in any significant way.

Anytime we encounter an outlier, we should pay close attention to what might be causing the unique findings. As Michael Hiltzik observed in the Los Angeles Times, the study’s findings “are out of line with almost all other studies of the minimum wage employment effect.” That doesn’t make them suspect, exactly, but it does warrant a close examination of the methodology to see whether the researchers missed or misinterpreted something.” As Carl Sagan observed with the acronym ECREE, “extraordinary claims require extraordinary evidence.”

So far, the evidence is going the other way. Not only is the data not public, so it hasn’t yet been peer reviewed, but what we do know about the study’s methodology has been criticized for its failings. The biggest is that it excludes businesses with more than one location. In other words, no McDonald’s or other fast-food restaurant chains were included. Nor was Wal-Mart, or any of the countless other well-known retail and restaurant chains.

That is quite a significant oversight: Michael Reich of the Center on Wage and Employment Dynamics at the University of California at Berkeley analyzed the impact of the methodology used. He notes that the UofW report excludes “48 percent of Seattle’s low-paid workforce out of their study.”

This is a major flaw.

Removing all of the chain stores, he said, “raises a big red caution flag about the representativeness of their sample.” Thus, argues Reich, the interpretation reached by the study is questionable. He adds that the UofW report failed to provide any evidence that “their sample is representative of all jobs in Seattle and Washington.” Similar criticism of the study’s methodology has been leveled by others, including Ben Spielberg of Teach For America and by Ben Zipperer and John Schmitt of the Economic Policy Institute.

I also have a beef with objectivity of the study’s lead researcher, Jacob Vigdor. He has written critically about minimum-wage laws in general, including this post from 2014: “The minimum wage is a lousy anti-poverty program.” Thus, he may not be the most objective person for assessing the impact of Seattle’s minimum wage laws.

When the law was originally passed, opponents of minimum wage increases warned of devastating consequences, including restaurant closings, layoffs and other significant problems. The trouble was the evidence went the other way, and none of their forecasts have come to pass. With the predictions of disaster not having materialized, the new tract is a study with a questionable methodology that excludes almost half of Seattle’s minimum-wage workers.

Good policy requires a robust debate between honest parties on all sides of any argument. Unfortunately, we have not gotten that from opponents of minimum-wage increases. That’s too bad, as it performs a disservice to those who want to see carefully crafted policy put into effect.

Article Link To The Bloomberg View:

Seattle Lawmakers Pass Tax On Highest Earners; Mayor Eager To Be Sued

By Eric M. Johnson
July 11, 2017

Seattle's city council unanimously passed a pioneering income tax on the city's highest earners on Monday, a measure that has become a clarion call for Democrats there even though it is likely to face a swift legal challenge over violating state law.

The measure created a 2.25 percent tax rate on individuals earning above $250,000 and married couples jointly earning above $500,000. The tax will add roughly $140 million in new annual revenue and affect fewer than 20,000 residents in the city of more than 660,000, supporters say.

The proposal has become a rallying cry for Democrats and activists in the liberal-leaning city who used local opposition to Republican President Donald Trump to advance long sought-after local policies.

Washington is one of seven U.S. states without a tax on personal income, and no city in the state has an income tax.

Supporters of the Seattle proposal, including Mayor Ed Murray, say the current tax code unfairly burdens poor and middle class residents because it relies on "regressive" taxes, such as taxes on property and sales transactions.

Proponents say new revenue is needed to offset any potential drop in federal funding under the Trump administration.

"Our goal is to replace our regressive tax system with a new formula for fairness, while ensuring Seattle stands up to President Trump's austere budget that cuts transportation, affordable housing, healthcare, and social services," Murray said by e-mail after the city council's 9-0 vote.

Earlier on Monday, Murray told a cheering crowd at a rally outside city hall he would sign the measure into law on Friday and welcomed a legal challenge.

The campaign for the new tax on Seattle's richest was launched earlier this year by Trump Proof Seattle, a coalition of community activists and residents.

Proceeds from the tax could be used to pay for transit services and affordable housing, Murray said. The city has been grappling with soaring housing prices in recent years, fueled in part by the growth of online retailer Amazon.com, which is headquartered in downtown Seattle.

Voters in Olympia, the state capital, rejected a similar tax on its highest earners last year. In 2010, Washington state voters rejected a state income tax at the ballot box.

Jason Mercier, a director at the conservative Washington Policy Center, said Seattle's tax conflicts with state law and court decisions. He said he expects the city to face a swift legal challenge after Murray signs the measure into law.

"There's something fundamentally wrong with elected officials passing a tax they know is against state law and the constitution with the hope of being sued and having a judge overturn prior decisions," Mercier said.

State law blocks a county or city from levying a tax on "net" income, although net income is not defined in the statute.

The Washington state Supreme Court has found that income is treated as property under the constitution and therefore has to be taxed uniformly and at no more than 1 percent of its value, Mercier said.

Article Link To Reuters:

Fed's Williams Still Sees Rate Hike, Asset Unwinding This Year

By Wayne Cole
July 11, 2017

A top U.S. central banker on Tuesday said he still expected one more rise in interest rates from the Federal Reserve this year and for it to start unwinding its massive balance sheet in the next few months.

Answering audience questions at an economics event in Sydney, San Francisco Federal Reserve Bank President John Williams said he believed a recent softening in U.S. inflation was transitory and that inflation would pick up to around 2 percent over the coming year.

Williams emphasized that if inflation did not accelerate as expected, that would argue for a much slower pace of rate rises than currently projected.

He also noted that raising rates and trimming the balance sheet were complimentary forms of tightening and his projections for policy took that into account.

Article Link To Reuters:

When The Kremlin Says ‘Adoptions,’ It Means ‘Sanctions’

By Amanda Taub
The New York Times
July 11, 2017

President Trump’s son Donald Trump Jr. initially defended his meeting with a Russian lawyer connected to the Kremlin during the 2016 presidential campaign by saying that it was primarily about adoption — a seemingly innocent humanitarian issue.

Reinstating American adoptions of Russian orphans certainly seems like a far less serious matter than a meeting about, say, the removal of United States sanctions on certain Russian officials.

But from the Russian perspective, whether the younger Mr. Trump and his associates knew it at the time or not, the issues of adoptions and sanctions are so inextricably linked as to be practically synonymous. (Mr. Trump said in a later statement that the lawyer, Natalia Veselnitskaya, had also promised to give him compromising information about Hillary Clinton.)

Understanding the connections between adoptions and sanctions offers a lens into the worldview and foreign policy goals of President Vladimir V. Putin of Russia, and into how even a meeting that really did focus primarily on adoption would also have been about much more.

What Connects The Two Issues? Leverage.

It might not seem obvious what sanctions have to do with American parents’ adoptions of Russian children, which is the topic that the younger Mr. Trump initially said Ms. Veselnitskaya wanted to discuss. Their connection comes down to one word: leverage.

The context is the Magnitsky Act, a 2012 American law that freezes the assets held in the United States by Russian officials responsible for human rights abuses. The law also bars these officials from receiving American visas. It was named after Sergei Magnitsky, a young Russian lawyer who died in pretrial detention after exposing a $230 million tax-theft scam perpetrated by Russian officials.

To the law’s backers, the Magnitsky Act was a way to strike a blow for justice. But to Mr. Putin, it seemed like an intolerable attack by the United States government against the stability of his own presidency.

Mr. Putin, though powerful, depends on the support of a small circle of powerful elites, in and out of government, who both keep him in power and help him enforce his will. In exchange, Mr. Putin sees that they are taken care of. The Magnitsky Act, by sanctioning some of those elites, sent a message that Mr. Putin might not be able to uphold his end of the bargain.

It also called into question whether lower-ranked officials could trust that they would be protected from punishment for tolerating or participating in illegal acts at the behest of Mr. Putin or his allies.

And the law embarrassed Mr. Putin by showing that his influence was not strong enough to prevent the law’s passage, despite his vigorous lobbying against it.

Revoking the law became an important foreign policy priority for Mr. Putin’s government. And he identified adoptions as an area that seemed to offer a way to force the issue.

In 2011, the year before the Magnitsky Act was passed, about 1,000 Russian children were adopted by American families, more than from any other foreign country. Many more adoptions were still pending, some for American parents who had already met the children they expected to take home. An adoption freeze would be a grievous loss for those families.

The Russian government, sensing that those parents would be a vocal pressure group, proposed a law known as the “anti-Magnitsky law,” which would halt all adoptions of Russian children by Americans — including those that were already in process. The Kremlin cited the case of Dima Yakovlev, a Russian toddler who died after being adopted by American parents, as a pretext for the rule.

But the government also made clear that the new law would be retaliation for the Magnitsky Act.

That pressure failed to sway the American government, and the Magnitsky Act stayed in place despite pleas from anguished adoptive parents.

But, for Moscow, the issues of adoption and sanctions became seen as linked and have remained that way — something that a Kremlin-connected lawyer like Ms. Veselnitskaya would surely have had in mind.

Lifting Of Sanctions Is A Priority For Putin.

Since that time, Russia’s efforts to reverse the Magnitsky Act and lift other sanctions, like those that the United States imposed after Russia’s invasion of Crimea, have been a constant through-line of its foreign policy. They remain a critical priority for Mr. Putin, who sees the sanctions as one part of a broader effort by Western governments to undermine his presidency.

Ms. Veselnitskaya has engaged in a vigorous campaign to reverse the Magnitsky Act, including promoting a documentary film that portrayed William F. Browder, Mr. Magnitsky’s former employer and the main lobbying force behind the act, as the true culprit behind the tax fraud that Mr. Magnitsky revealed.

Michael McFaul, who was the United States ambassador to Russia when the Magnitsky Act was passed and is now a professor at Stanford, referred to Ms. Veselnitskaya as an “anti-Magnitsky lobbyist” in a tweet, saying that she could only have been raising the adoptions issue in the context of the Magnitsky sanctions.

Mr. Browder also believes that Ms. Veselnitskaya was acting as a Kremlin emissary when she approached the Trump campaign. “There is absolutely no question that they were looking for an opening to repeal the Magnitsky Act,” he said. “They were going to the possible next president of the United States to do that.”

Donald J. Trump’s often-expressed admiration for Mr. Putin may have led the Russian president to believe that the Republican candidate would be receptive to those efforts as part of a broader shift away from the hostility of the later years of Barack Obama’s presidency.

The Magnitsky Act marked a turning point between the relative openness and cooperation between Russia and the United States during Mr. Obama’s early years as president and the rapidly escalating hostilities of his second term.

From the Russian perspective, “adoptions,” as an issue, means more than parents adopting children. It means an end to sanctions and a return to a sunnier era in United States-Russia relations, an issue that is core to Mr. Putin’s agenda and that the younger Mr. Trump’s father had, at the time of the meeting, promised to bring about.

Article Link To The NYT: