Monday, July 17, 2017

Monday, July 17, Morning Global Market Roundup: Asia Shares Rise On Strong China GDP, Accommodative Fed View

By Nichola Saminather
Reuters
July 17, 2017

Asian stocks set a fresh two-year high on Monday, boosted by stronger-than-expected economic growth in China and bets that lacklustre U.S. data will keep the Federal Reserve cautious about the pace of further policy tightening.

Chinese blue-chips recouped steep early losses after data showed the world's second-largest economy grew at a slightly faster than expected pace of 6.9 percent in the second quarter, thanks to robust industrial output, retail sales and exports.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS extended earlier gains to climb 0.4 percent after the buoyant China readings. Japanese markets were closed for a holiday.

Australian shares , which started the day in negative territory, were 0.1 percent higher, while South Korea's KOSPI .KS11 jumped 0.4 percent.

By midday in China, the CSI 300 .CSI300 was 0.2 percent higher, after slumping as much as 2.2 percent earlier. The Shanghai Composite .SSEC narrowed earlier losses of as much as 2.6 percent to trade 0.1 percent lower.

Jingyi Pan, a market strategist at IG in Singapore, said the market fell initially after news at the weekend that President Xi Jinping wants to create a new cabinet-level committee to coordinate financial oversight, sparking concerns of further policy tightening.

Asian markets also rode the updraft from a strong Wall Street performance on Friday.

The Dow .DJI and S&P 500 .SPX hit record highs after data showed consumer prices were unchanged in June and retail sales fell for a second straight month, pointing to tame inflation and subdued expectations of strong economic growth in the second quarter which could make Fed policymakers more cautious.

The chances of a Fed rate hike in December fell to 43.1 percent after the data came out from 55 percent late on Thursday, according to the CME Group's Fedwatch tool.

The dollar index .DXY, which tracks the greenback against a basket of trade-weighted peers, hit a 10-month low early on Monday. It was trading flat at 95.176 after losing 0.6 percent on Friday.

"Friday’s U.S. data led to more USD selling," Stephen Innes, senior trader at OANDA, wrote in a note.

"With less than a 50 percent December rate hike probability priced in, and with no supportive Fed speak on the calendar before July 26th, the dollar could struggle."

U.S. 10-year Treasury yields US10YT=RR, however, which fell to as low as 2.279, recovered to end at 2.3319 percent on Friday.

The dollar was 0.1 percent higher at 112.61 yen JPY=D4 early on Monday, after closing down 0.6 percent on Friday.

The Bank of Japan is expected to keep its monetary policy settings unchanged when it meets on Wednesday and Thursday.

The weakness in the dollar saw other currencies soar, with the Australian dollar AUD=D3 hitting its highest level in over two years and the Canadian dollar CAD=touching a one-year high early on Monday.

The Aussie pulled back to trade 0.2 percent lower than its Friday close at $0.7811, following a 1.3 percent surge, and the loonie was 0.1 percent weaker at C$1.2655 to the dollar, retaining most of Friday's 0.6 percent jump.

The euro EUR=EBS slipped slightly to $1.14625, but remained close to its highest in a year hit last week, after gaining 0.6 percent on Friday.

In commodities, oil inched higher, extending last week's gains on signs of lower U.S. inventories and stronger demand.

U.S. crude CLc1 rose 0.2 percent to $46.64 a barrel.

Global benchmark Brent LCOc1 added 0.3 percent to $49.03.

The dollar's loss was gold's gain, with the precious metal rising on Friday. Spot gold XAU= was 0.15 percent higher at $1,230.85 an ounce.


Article Link To Reuters:

Oil Prices Firm On Strong China Demand, Signs Of U.S. Output Slowdown

By Henning Gloystein
Reuters
July 17, 2017

Oil prices strengthened on Monday, supported by a slowdown in the growth of rigs looking for crude in the United States and because of strong refinery demand from China.

Brent crude futures, the international benchmark for oil prices, were at $49.04 per barrel, up 13 cents, or 0.3 percent, from their last close.

U.S. West Texas Intermediate (WTI) crude futures were at $46.64 per barrel, up 10 cents, or 0.2 percent.

Both crudes extended gains from strong performances last week.

Traders and analysts said the rising prices were a result of strong demand as well as signs that a relentless climb in U.S. oil production was slowing down.

"The slowing pace of increases combined with massive drawdowns last week on both official crude inventory numbers from the U.S. probably explains the positive sentiment in general at the moment," said Jeffrey Halley, senior market analyst at futures brokerage OANDA in Singapore.

"Last week's strong draw on U.S. oil inventories was supported by comments from the IEA that demand is growing stronger than they had initially estimated," ANZ bank said on Monday. "The relentless climb in drill rigs operating in the U.S. also subsided," it said.

U.S. drillers added two oil rigs in the week to July 14, bringing the total count up to 765, energy services firm Baker Hughes said on Friday.

While that is the highest level since April 2015, the rate of those additions has slowed. Rig additions over the past four weeks averaged five, the lowest since November 2016.

"Given the usual time lag between price signal and drilling decision, the coming month, which also features the E&P (exploration and production) earning season, will be key," said U.S. bank Goldman Sachs.

In Asia, China's refinery activity continues to indicate strong fuel demand.

Chinese oil refineries increased throughput in June to the second highest on record, with some independent plants raising output even as state oil majors prepare to take drastic steps to cut production during the peak summer season.

Throughput last month hit 46.08 million tonnes, or 11.21 million barrels per day (bpd), a 2.3-percent rise from a year ago and up from May's 10.98 million bpd, data from the National Bureau of Statistics (NBS) showed on Monday.

The number was just short of December's record high of 11.26 million bpd.


Article Link To Reuters:

Round 1: Brexit Talks Start In Brussels With 20 Months To Go

By Alastair Macdonald
Reuters
July 17, 2017

Brexit Secretary David Davis launches a first round of negotiations on Britain's withdrawal from the European Union on Monday when he meets the EU's Michel Barnier for four days of talks between their teams in Brussels.

A month after a first meeting where the two exchanged gifts inspired by a shared passion for hillwalking and spoke of the mountain of complexity they must climb, the Frenchman will press Davis to agree to Britain covering substantial British financial commitments and offer more detail on other British proposals.

With little more than a year to settle divorce terms before Britain leaves, deal or no deal, on March 30, 2019, the 27 other EU national leaders want British Prime Minister Theresa May to rally her divided nation swiftly behind a clear, detailed plan that can minimize economic and social disruption across Europe as its second biggest economy cuts loose from the continent.

Davis and Barnier will shake hands for the cameras at the European Commission's Berlaymont headquarters at 9:15 a.m. (0715 GMT) before a first full session of talks.

"We made a good start last month, and this week we’ll be getting into the real substance," Davis said in remarks prepared for delivery ahead of the meeting. "Protecting the rights of all our citizens is the priority for me going into this round and I'm clear that it's something we must make real progress on."

His office described an offer made by Britain last month as "fair and serious", though Barnier has dismissed it as falling short of the EU demand that its 3 million citizens in Britain keep all their existing rights for life and have recourse to the EU courts to enforce those rights even after Britain has left.

Priorities

Negotiators will break into groups discussing four key areas of priorities before a planned news conference on Thursday.

Barnier, who secured Davis's consent last month to the EU's broad structure for talks, wants to hold the Englishman publicly to whatever else has been agreed during the week, EU officials say.

Working groups will focus on three areas: citizens' rights; the EU demand that Britain pays some 60 billion euros ($70 billion) to cover ongoing EU budget commitments; and other loose ends, such as what happens to British goods in EU shops on Brexit Day.

A fourth set of talks, run by Davis and Barnier's deputies Oliver Robbins and Sabine Weyand, will focus on curbing problems in Northern Ireland once a new EU land border separates the British province from EU member Ireland to the south. Some of that will have to wait for clarity on future trade relations.

One key early advance that EU officials hope for this week is for Britain to stop challenging the principle it will owe Brussels money -- though how much will have to be argued over and cannot be calculated until Britain actually leaves.

Three more weeks of talks, interspersed with internal EU sessions to coordinate the views of the 27 other governments, are scheduled, from late August until early October. At that point, Barnier hopes to be able to show "significant progress" on the divorce priorities for EU leaders to give him a mandate to launch negotiations on a future free trade agreement.

Davis and May had pressed over the past months for trade talks to start immediately but accepted the EU's sequence for negotiations last month. However, Brussels accepts that details on the divorce terms will still be open when trade talks begin.

In a sign British ministers are coming round to the EU view that a trade deal can at best be sketched in outline over the next 20 months, two members of May's cabinet who were on opposing sides of the Brexit referendum debate both said they expected some transitional phase to start in 2019 to smooth the passage from full EU membership to a final free trade pact.


Article Link To Reuters:

Oil Skeptics Let A Little Sunshine In

Managed-money WTI net-longs rise by most in seven weeks; Short positions declined to the lowest level in four weeks.


By Jessica Summers
Bloomberg
July 17, 2017

Oil skeptics are letting a little sunshine in.

After the worst June for oil in six years, hedge fund bets on declining West Texas Intermediate retreated. That made room for futures to rebound more than 5 percent last week on optimism that the summer will finally boost demand for crude and gasoline.

“The market is starting to recognize that demand is a little better than what has been the consensus view so far this year,” Matt Sallee, who helps manage $16 billion in oil-related assets at Tortoise Capital Advisors in Leawood, Kansas, said by telephone.



While doubts persist that the Organization of Petroleum Exporting Countries and its allies will manage to bring the oil market back to balance anytime soon, the mood improved as the International Energy Agency said world demand is climbing faster than initially estimated. Meanwhile, Libya and Nigeria may be asked to join the other members of OPEC in capping output, according to Kuwait’s oil minister.

In the U.S., data from the Energy Information Administration showed crude and gasoline stockpiles shrinking.

Hedge funds increased their WTI net-long position, or the difference between bets on a price increase and wagers on a drop, by 19 percent to 178,654 futures and options over the week ended July 11, the sharpest increase in seven weeks, according to data from the U.S. Commodity Futures Trading Commission. The improvement was entirely due to a 21 percent retreat in shorts, more than offsetting a 2.1 percent decline in longs.

The mood has been largely set by big swings in bearish wagers over the past months, with bullish bets not increasing more than 5 percent in any week since January.

Bets on the benchmark U.S. gasoline contract flipped to a net-bullish position for the first time since early June. The net-position on diesel was the least bearish in five weeks.



Investors are “starting to see, not necessarily full conviction, but a little bit more optimism about some of the developments in the market, even though the overall tone is clearly still bearish. It’s kind of going from bad to a little less bad,” Tamar Essner, an energy analyst at Nasdaq Inc. in New York, said by telephone. “The shorts were at very high levels. We knew that that wasn’t going to be sustainable.”

WTI closed at $46.54 a barrel on Friday after edging higher each day of last week. Stuck below $50 since May, the U.S. crude benchmark is still down 13 percent for the year and worth less than half its price three years ago.

“For the near-term, oil is in a $40-$50 a barrel range. As you get toward the low end of that range, you see shorts close out,” Sallee said. “Your risk-return is kind of skewed against you if you are on the short side and on the lower end of that range.”

Last week, EIA data showed U.S. crude stockpiles slid by 7.56 million barrels, the biggest decline since September, in the week ended July 7. Gasoline supplies fell for a fourth straight week, tumbling to the lowest level since December, and demand increased by 81,000 barrels a day.

“Perhaps, the worst is behind us,” Stewart Glickman, an energy equity analyst at CFRA Research in New York, said by telephone. "It doesn’t mean necessarily that we are on the verge of a V-shaped recovery. You can bounce along the bottom for quite a while.”


Article Link To Bloomberg:

Global Trade’s Evolution May Check Trump’s Protectionism

President’s approach differs from predecessors, who praised free trade but pushed protective measures.


By Bob Davis
The Wall Street Journal
July 17, 2017

President Donald Trump has looked to make protectionism respectable again, citing Abraham Lincoln’s embrace of tariffs, pulling the U.S. out of a Pacific trade pact and preparing tariffs on steel imports. But changes in the international economy and the institutions governing trade are acting as constraints on what Mr. Trump can achieve.

Gone are Mr. Trump’s campaign threats to hit China with 45% tariffs and Mexico with 35% levies. Steel tariffs could come in a matter of days, but steel lobbyists worry they will be more limited in magnitude than similar actions taken in the past. Meanwhile, Mr. Trump’s commerce secretary says talks to update the North American Free Trade Agreement, which commence in August, will be guided by the principle, “Do no harm.”

“The interests of companies and sectors are making it very difficult to go through with the extreme (measures) Trump proposed,” says Brandeis University trade economist Peter Petri, who is known for forecasting the economic impact of trade measures.

During the campaign, Goldman Sachs estimates, markets were betting that Mr. Trump’s trade policies would lift tariffs by about 10 percentage points—enough to jolt the global economy. Now Goldman estimates the impact of Mr. Trump’s more limited efforts at a 1 percentage point tariff increase. “Market expectations of major trade policy changes now appear to have completely reversed,” Goldman economists Daan Struyven and Ben Snider write.

Mr. Trump has taken the opposite approach of some White House predecessors. He threatens protection but so far has acted modestly. They praised free trade but pushed protection.



Richard Nixon imposed a 10% import surcharge to press trading partners to revalue their currencies. Ronald Reagan started more than a decade of pressure on Japan, whose imports battered U.S. industries, much as China’s do today. He imposed stiff tariffs on Japanese electronics, and forced Japan to limit exports of cars to the U.S. and buy U.S. semiconductors. George H.W. Bush continued the semiconductor deal and pressed Japan to buy more U.S. auto parts.

Even Bill Clinton, seen now as an avatar of free trade for his passage of Nafta and a deal that let China join the World Trade Organization, badgered Japan on cars, auto parts and computer chips throughout his first term. He threatened tariffs on luxury Japanese automobiles, calling off the levies at the last moment after Japan agreed to expand U.S. auto production.

Later presidents had their protectionist moments too, with George W. Bush imposing tariffs on steel imports and Barack Obama singling out Chinese tire imports

Past presidents used protection in part to give them domestic political cover to push for overall trade liberalization. From Nixon’s term through the end of Clinton’s, the U.S. negotiated two global trade pacts, Nafta and the creation of the WTO, among other international trade deals. Now those trade deals limit Mr. Trump’s maneuvering room.

Many of the unilateral actions that Mr. Reagan used to punish Japan now would be handled as trade cases at the WTO, which generally frowns on protection and takes years to make decisions. Deals to reserve parts of a foreign market for U.S. companies are forbidden by WTO rules—although trade experts say such arrangements could still be used if they don’t raise objections from other WTO members.

Industries that once lobbied heavily for protection have become more international, making them less likely to push for restrictions.

When the U.S. and Japan fought over Japanese car imports, for instance, it may have made sense to put quotas on Japanese automobile imports. But that logic doesn’t work for the U.S. and Mexico. U.S.-based car makers—some of them Japanese owned—ship parts both ways across the border to build a car cooperatively.

The textile industry, long one of the most aggressive voices for trade protection, has become a defender of Nafta, because of how international the industry has become. The industry “supports building on the successes of Nafta through seeking reasonable improvements,” the National Council of Textile Organizations recently testified, “but not a cancellation, due to the high level of supply chain integration.”

On steel tariffs, Mr. Trump is using a rationale, national security, that President Nixon cited as a reason for his across-the-board import surcharge. This time, the steel industry is asking the administration to use tariffs for a more limited objective—to prod China to cut back its vast steel excess capacity. The administration, steel industry officials say, is looking at how to apply tariffs without prompting widespread retaliation.

“If the steel consumers or the critics get their way, there is real possibility that the relief Trump will provide is smaller,” than what occurred under erstwhile free-trade presidents, Mr. Obama and George W. Bush, said Scott Paul, president of the Alliance for American Manufacturing, a steel industry and labor group.

None of this means that a new era of trade liberalization is at hand. It’s been 23 years since the last global trade deal and none is on the horizon. Tariff cuts are slowing around the world, according to the International Monetary Fund, as are the number of free-trade deals being signed annually. But the architects who built the international trading system over the past half-century created a structure resistant to dramatic change. Over time Mr. Trump may find himself ensnared by it.


Article Link To The WSJ:

A Sense Of Calm Has Descended On China's Markets. Don't Fall For It

Liquidity boost, quiet regulators see buyers return to bonds; Analysts say more curbs to come as leverage remains elevated.


Bloomberg News
July 17, 2017

A sense of calm has descended on China’s markets after a flurry of activity from financial regulators. While it’s emboldening investors, analysts are waiting for the storm.

Liquidity has come roaring back after a dry spell during April and May, when President Xi Jinping ordered a check of China’s financial system and an intensified focus on deleveraging saw mainland debt and equities sell off. That, coupled with what seems like a lull in Beijing’s regulatory fervor, has sparked a resumption in corporate bond buying and a return to borrowing as speculation takes hold that the worst of the crackdown may be over.

To market watchers from Pacific Investment Management Co. to Australia & New Zealand Banking Group Ltd. and Standard Chartered Plc that’s a concern -- not least because the efforts so far have barely budged leverage levels.

“The market should be more cautious, as such complacency is not what policy makers want to see,” said Ding Shuang, chief China economist at Standard Chartered in Hong Kong. “The government won’t easily give up on deleveraging. It still has a way to go.”



Xi said at a two-day National Financial Work Conference ended Saturday the central bank will play a stronger role in defending against risks, calling for more work on safeguarding the financial system and modernizing its regulatory framework. Authorities will proactively prevent and resolve systemic financial risks, and step up efforts to reduce leverage in the economy, the official Xinhua News Agency reported, citing Xi’s comments at the gathering.

With the economy in recovery mode, China has set its sights on tackling a shadow banking sector that’s flourished amid a wider increase in overall debt. That’s taken the form of clampdowns on everything from wealth-management products and property investing to stock speculation and illegal trading.

Since the start of June, however, the banking regulator has largely been quiet, and the People’s Bank of China has acted to bolster liquidity after aggressively driving up money-market rates at the start of the year.

That doesn’t mean their work is done, and authorities are just assessing their progress, says Gene Frieda, a global strategist at Pimco in London.

Deleveraging hasn’t really begun if China’s end-game is to cut total credit, so it’s likely to ramp up again once the twice-a-decade Communist Party Congress concludes later this year, he said. What’s more, Frieda suggests the market may underestimate Beijing’s intentions.

“If there’s complacency, it’s around having mistaken shadow banking system deleveraging as the end goal, rather than control of total leverage,” he said. “If the latter is the target, then Chinese aggregate credit growth is set to slow more sharply in late 2017, which in turn would potentially unsettle markets globally.”

Meanwhile, market players are focused on the here and now. Government bond yields and money-market rates have fallen from multi-year highs and local firms like Citic Securities Co. and China Merchants Securities Co. were recommending investors buy debt again.

Yields on three-year AAA rated corporate bonds have dropped half a percentage point from a two-year-high reached mid-May, just after the communication from regulators on deleveraging was at its most intense. The borrowing cost was at 4.5 percent on Friday, according to ChinaBond data.

This means the market could be set for a shock, with the next round of moves potentially “more drastic” than anticipated, says David Qu, a market economist at ANZ in Shanghai.

“The market appears to be quite confident that it could force policy makers to ease when there’s volatility,” he said. “This isn’t normal and I’m sure the government has noticed this inclination.”

Some seem to have registered that possibility and are preparing for an uptick in interest rates. Chinese companies are picking up the pace of bond issuance, which may indicate they are locking in lower borrowing costs while they still can.

Small cap stocks slumped last week, while shares in large companies surged, suggesting investors may have been shifting to safer bets on concern about renewed deleveraging zeal, according to KGI Securities Co. The mainland market -- which copped the brunt of the selloff in April and May as local traders shifted to offshore Chinese equities -- missed out on a rally last week as the Hang Seng China Enterprises Index jumped the most since November.



Mindful of the reaction to the first round of deleveraging, the authorities may well try and be more sensitive going forward, says Song Yu, chief China economist at Beijing Gao Hua Securities Co., Goldman Sachs Group Inc.’s mainland joint venture partner.

“For the rest of this year, the government will put its foot on and off the brake as needed when it comes to credit, but they probably won’t push it down as far as they did in the first quarter,” he said. “Policy makers will offer an amount of liquidity that’s just enough to maintain healthy growth, but they definitely won’t pump in more gas to boost borrowing.”


Article Link To Bloomberg News:

China Economic Expansion Exceeds Estimates On Factory Rebound

2Q GDP expands 6.9% YoY, matching robust momentum in 1Q; Retail sales, investment, industry output all beat estimates.


Bloomberg News
July 17, 2017

China’s economy maintained its momentum last quarter, as global trade and domestic demand spurred a pickup at the nation’s factories.

Key Points

-- Gross domestic product increased 6.9 percent in the second quarter from a year earlier, compared with a 6.8 percent median estimate in a Bloomberg survey, matching the pace of expansion in the first quarter
-- Industrial output rose 7.6 percent in June from a year earlier, compared with an estimated 6.5 percent increase
-- Fixed-asset investment climbed 8.6 percent in the first half of this year, versus a median forecast of 8.5 percent gain
-- Retail sales jumped 11 percent from a year earlier in June, compared with a median estimate of 10.6 percent in a Bloomberg survey



Big Picture

The expansion highlights the resilience of China’s economy, as activity has remained robust even as policy makers have tried to curb excessive and speculative borrowing, leading to a slowdown in money supply growth. Synchronized growth in most developed markets has meant that exports have helped to keep the expansion on track, and the effects of a cooling property market are yet to kick in. The statistics bureau said the result "provides a solid basis" for meeting the full-year growth target of 6.5 percent or above.

Economist Takeaways


"It shows that Beijing’s financial deleveraging was well timed and carefully targeted not to have much spillover on the real economy," said Rob Subbaraman, chief economist for Asia ex-Japan at Nomura Holdings Inc. in Singapore. "Fiscal stimulus remains an important driver of growth. It’s also encouraging to see more signs of rebalancing with the pickup in retail sales growth."

"What is important to note is that this is heavily driven by credit and fixed-asset investment," said Christopher Balding, an associate professor at the HSBC School of Business at Peking University in Shenzhen. "Despite the talk, there is no change to the Chinese growth model."

"Growth overall was very robust," said Iris Pang, an economist at ING Bank NV in Hong Kong. "It is more of a consumption story than an investment story."



The Details

-- In the quarter, output expanded 1.7 percent from the first three months
-- Services led the way in year-to-date growth, with the tertiary sector expanding 7.7 percent


Article Link To Bloomberg News:

Global Cyber Attack Could Spur $53 Billion In Losses

By Suzanne Barlyn
Reuter
July 17, 2017

A major, global cyber attack could trigger an average of $53 billion of economic losses, a figure on par with a catastrophic natural disaster such as U.S. Superstorm Sandy in 2012, Lloyd's of London said in a report on Monday.

The report, co-written with risk-modeling firm Cyence, examined potential economic losses from the hypothetical hacking of a cloud service provider and cyber attacks on computer operating systems run by businesses worldwide.

Insurers are struggling to estimate their potential exposure to cyber-related losses amid mounting cyber risks and interest in cyber insurance. A lack of historical data on which insurers can base assumptions is a key challenge.

"Because cyber is virtual, it is such a difficult task to understand how it will accumulate in a big event," Lloyd's of London Chief Executive Inga Beale told Reuters.

Economic costs in the hypothetical cloud provider attack dwarf the $8 billion global cost of the "WannaCry" ransomware attack in May, which spread to more than 100 countries, according to Cyence.

Economic costs typically include business interruptions and computer repairs.

The Lloyd's report follows a U.S. government warning to industrial firms about a hacking campaign targeting the nuclear and energy sectors.

In June, an attack of a virus dubbed "NotPetya" spread from infections in Ukraine to businesses around the globe. It encrypted data on infected machines, rendering them inoperable and disrupted activity at ports, law firms and factories.

"NotPetya" caused $850 million in economic costs, Cyence said.

In the hypothetical cloud service attack in the Lloyd's-Cyence scenario, hackers inserted malicious code into a cloud provider's software that was designed to trigger system crashes among users a year later.

By then, the malware would have spread among the provider's customers, from financial services companies to hotels, causing all to lose income and incur other expenses.

Average economic losses caused by such a disruption could range from $4.6 billion to $53 billion for large to extreme events. But actual losses could be as high as $121 billion, the report said.

As much as $45 billion of that sum may not be covered by cyber policies due to companies under-insuring, the report said.

Average losses for a scenario involving a hacking of operating systems ranged from $9.7 billion to $28.7 billion.

Lloyd's has a 20 percent to 25 percent share of the $2.5 billion cyber insurance market, Beale said in June.


Article Link To Reuters:

Trump Holding Theme-Week Events To Turn Focus To Economic Agenda

President highlighting companies building products in the U.S; Visit for commissioning of aircraft carrier also planned.


By Justin Sink
Bloomberg
July 17, 2017

President Donald Trump will seek to highlight his economic agenda with a series of theme weeks focused on domestic policy, part of an effort to shift focus by a White House besieged by the investigations into Russian election meddling and struggling to pass a health-care bill.

The effort will kick off Monday with “Made in America” week, with the president championing companies that build products in the U.S. On Monday, the administration has invited firms from all 50 states to show their domestically produced products at the White House. On Wednesday, Trump plans to call on U.S. companies to make more of their products at home. He also is expected to travel to Virginia during the weekend for the commissioning of the USS Gerald R. Ford aircraft carrier.

“For too long our government has forgotten the American worker,” White House spokeswoman Helen Aguirre Ferré told reporters in a call on Sunday. Those workers, she said, will now be “championed” by Trump.

Asked whether the president will push the Trump Organization -- which produces many of the branded products from White House adviser and first daughter Ivanka Trump overseas -- to move operations back to the U.S., Aguirre Ferré said, “We’ll get back to you on that.”

The theme weeks will continue throughout the month, with events planned to highlight “American Heroes” and the “American Dream,” Aguirre Ferré said.

While Trump is holding the theme-week events, investors will be watching to see whether he proceeds with efforts to impose tariffs or quotas on steel imports. The administration has ordered a review under a Cold War-era trade law that allows the president to impose restrictions on imports that are found to threaten national security.

‘Big Problem’


“Steel is a big problem,” Trump told reporters last week. “They’re dumping steel and destroying our steel industry, they’ve been doing it for decades, and I’m stopping it.”

Commerce Secretary Wilbur Ross, who is leading the investigation, had planned to submit his findings in June, but the administration missed its self-imposed deadline. A White House official, who requested anonymity to discuss the “Made in America” week events before they occurred, said Sunday there is no specific timeline for Ross to present the findings of his investigation.

The push to refocus on the president’s economic agenda comes as the White House has struggled to move beyond questions about interactions between Russia and the Trump campaign, including the revelation that the president’s son took a meeting in June 2016 after being told an agent of the Russian government would provide damaging material about Hillary Clinton.

Trump has the lowest six-month approval rating of any president during the past 70 years, according to a ABC News/Washington Post poll released Sunday. Just 36 percent of those surveyed approved of his job performance, compared with 58 percent who disapproved.

Trump dismissed the poll as inaccurate while suggesting the result was “not bad” in a Twitter posting on Sunday morning to his 33.9 million followers.

“The ABC/Washington Post Poll, even though almost 40% is not bad at this time, was just about the most inaccurate poll around election time!” the president wrote.


Article Link To Bloomberg:

Elon Musk Lays Out Worst-Case Scenario For AI Threat

Powerful technology will threaten all human jobs, could even spark a war, Tesla CEO says.


By Tim Higgins
The Wall Street Journal
July 17, 2017

Elon Musk warned a gathering of U.S. governors that they need to be concerned about the potential dangers from the rise of artificial intelligence and called for the creation of a regulatory body to guide development of the powerful technology.

Speaking Saturday at the National Governors Association meeting in Rhode Island, the chief executive of electric-car maker Tesla Inc. and rocket maker Space Exploration Technologies Corp. laid out several worst-case scenarios for AI, saying that the technology will threaten all human jobs and that an AI could even spark a war. “It is the biggest risk that we face as a civilization,” he said.

Mr. Musk has been vocal about his concerns about AI and helped create OpenAI, a nonprofit research group that aims for the safe development of the technology. He suggested to the governors that a regulatory agency needs to be formed to begin gaining insight into fast-moving AI development, followed by putting regulations into place.

“Right now the government doesn’t even have insight,” he said. “Once there is awareness people will be extremely afraid, as they should be.”

Proponents of AI say such concerns are premature, given the current state of the technology. Arizona Gov. Doug Ducey, a Republican who said that he has spent his own career trying to reduce government regulations, questioned Mr. Musk over the suggestion of creating new rules, saying that he was unsure what policy makers could do beyond pushing for a slowdown in development. “I was surprised by your suggestion to bring regulations before we know what we are dealing with,” Mr. Ducey said.

“For sure the companies doing AI—most of them, not mine—will squawk and say this is really going to stop innovation,” Mr. Musk said. But he said he doubted that such a move would cause companies to leave the U.S.

During his talk, Mr. Musk also was asked about the pressures that come from the valuation of Tesla, whose stock has risen more than 50% this year ahead of the introduction of a new sedan. The market capitalization has made Tesla bigger than Ford Motor Co. and, at times, larger than General Motors Co.

Those auto makers, unlike Tesla, are profitable and sell many more vehicles than the niche luxury brand.

Mr. Musk reiterated that shares of Tesla are trading at a price “higher than we have any right to deserve” and that the high price reflects optimism over the company’s future.

“Those expectations sometimes get out of control,” he said. But Mr. Musk said he is committed to making Tesla a success. Besides selling shares to pay for taxes, Mr. Musk said he is avoiding selling company shares. “I’m going down with the ship,” he said.


Article Link To The WSJ:

Stock Market Poised To Ride Stellar Earnings To New Heights

‘The canary in the coal mine is earnings and the canary is singing a very sweet song’


By Sue Chang
MarketWatch
July 17, 2017

Another quarter of stellar earnings could juice an already primed stock market, pushing key indexes to new records in coming weeks.

Wall Street analysts are forecasting earnings to grow near double digits as corporations beat expectations, putting second-quarter results on pace to be among the best since fourth-quarter 2011.

John Butters, senior analyst at FactSet, projected earnings per share to rise 6.5% in the April-June quarter but noted that actual increase could top 9% given that growth rates tend to adjust about 2.9 percentage points higher as more companies announce quarterly performance data.

Of the handful of S&P 500 index SPX, +0.47% companies that have reported so far, 80% have beat mean EPS estimate while 83% have exceeded mean sales target, he said.

Karyn Cavanaugh, senior market strategist at Voya Financial, who predicted earnings growth of 6% to 7%, was likewise upbeat.

“The canary in the coal mine is earnings and the canary is singing a very sweet song right now,” said Cavanaugh.

Brian Belski, chief investment strategist at BMO Capital Markets, forecast second-quarter earnings to rise 7%, paling in comparison to the “almost perfect” first-quarter gain of 13.2%. However, he still believes analysts are being overly cautious in their outlook given the soft dollar—which makes U.S. products price competitive overseas—and a stronger global economy.



“We believe analysts continue to underestimate the effect of these conditions on earnings power. Therefore, we would not be surprised if overall surprise (no pun intended) comes close to matching the strength exhibited during first quarter 2017. If that winds up being the case, we are looking at another quarter of double-digit earnings growth,” said Belski in a report.

As the following chart by LPL Financial shows, strategists expect technology, energy and financial companies to underpin a strong quarter for earnings. Cavanaugh also believes that consumer discretionary—a sector that many investors may have written off on tepid retail and consumer sentiment data—could also post better-than-expected results.



Apart from the corporate sector, the economic environment remains generally ideal for stocks without apparent signs of an immediate recession or overheating, what many economists would deem a “Goldilocks” economy.

The only possible headwind for equities at this time is political uncertainty as President Donald Trump struggles to introduce meaningful policy change amid mounting challenges, including a probe into whether his campaign actively colluded with Russia to interfere in the U.S. election.

“It’s a bit frustrating. The market takes two steps forward and then one step back. But we are moving in the right direction,” said Cavanaugh.

Next week, 68 S&P 500 companies and nine Dow Jones Industrial Average DJIA, +0.39% components are scheduled to report results, according to FactSet’s Butters.

Among notable earnings to watch are Bank of America Corp. BAC, -1.67% Johnson & Johnson JNJ, +0.56% Goldman Sachs Group Inc. GS, -0.78% International Business Machines Corp. IBM, +0.40% Morgan Stanley MS, -0.70% Visa Inc.V, +1.03% Qualcomm Inc. QCOM, +1.03% Microsoft Corp. MSFT, +1.41% eBay Inc. EBAY, +1.59% and General Electric Co. GE, -0.04%

Stocks rose on Friday with the S&P 500 and the Dow closing at records while the Nasdaq COMP, +0.61% finished within 10 points of its all-time high close.


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Republicans Aren’t Team Players

GOP Senators who defect from ObamaCare repeal will hurt themselves, their party and the country.


By Fred Barnes
The Wall Street Journal
July 17, 2017

Politics is a team sport, and Republicans are playing it poorly. They have one more chance in the Senate to repeal and replace ObamaCare—possibly their last hope for a victory.

Democrats are performing like a well-coached team. Minority Leader Chuck Schumer has all 48 members of his caucus on board with saving ObamaCare at all cost. It’s been a successful strategy.

It works for one reason: Republicans are divided. Their 52-48 majority in the Senate means they can lose two votes and still prevail, since Vice President Mike Pence is the tiebreaker. After promising to get rid of ObamaCare for the past seven years, it shouldn’t be difficult.

But as many as eight Republican senators opposed the first GOP bill, forcing Majority Leader Mitch McConnell to come up with a revised version. While an improvement, it has encountered opposition too. Mr. McConnell is skillful in bringing senators together. But here his task is more difficult than usual because the dissidents don’t all agree on what’s wrong with the bill. Appeasing one senator may alienate another.

This is an example of why legislative success depends on operating as a team. You don’t abandon your team just because you don’t get everything you want (or want left out). You hold your nose and vote for an imperfect measure, sometimes merely because it’s politically beneficial and better than the alternative.

This is especially true in dumping ObamaCare. The Republican alternative is a more free-market health-care system in which people can buy the insurance they want, not what government requires.

Sticking with the team makes that possible. But too many Republicans aren’t comfortable as team players. To them, it’s shady and unprincipled to vote for something about which you have serious doubts. Democrats are more realistic and less persnickety, so they’re better at uniting.

The political consequences of failing to eliminate ObamaCare would be disastrous for Republicans next year. Midterm elections are always tough for the party that holds the White House. But reneging on the promise to “repeal and replace” would put Republican control of the House and even the Senate at risk.

Worse, ObamaCare would be further entrenched with Republican help. If repeal fails, Mr. McConnell’s Plan B is to compromise with Democrats to stabilize the health insurance marketplace and keep ObamaCare alive and kicking. He would have no other choice.

When the voting begins, Republican senators need to ask themselves three questions: How would the result affect you? How would it affect your party? How would it affect the country?

On the first question, if any Republican senator sees voting to uphold ObamaCare as politically safer, think again. Trying to reach across the aisle to protect Medicaid’s rate of growth won’t win you any new Democratic votes. But if you desert the GOP, the base won’t forget or forgive. Republicans care passionately about ending ObamaCare. If you cross them on this vote, large numbers will cut you loose. There’s private polling on this, by the way.

The House Freedom Caucus learned this the hard way. In May, when its members blocked the first House health-care bill from going forward, they expected to be hailed as heroes. They weren’t. When a second bill was offered, they did nothing to stop it. They got behind the team and it passed.

If the Republican Party fumbles the Senate vote, it will suffer—and will deserve to. Having made the death of ObamaCare its overriding concern, a GOP that fails to deliver would shatter its credibility. An important element of the Republican brand is its identity as the conservative party. Fewer would see it that way if ObamaCare survives. GOP voter turnout would fall, and the party’s candidates would feel the difference.

What about the country? It wouldn’t benefit from making ObamaCare permanent. Health care would cost more and heal less. A political comeback by Democrats could lead to a single-payer system. Anyone who has experienced medical treatment at a Veterans Administration hospital would find the new system quite familiar.

Sen. Rand Paul of Kentucky opposes the Senate bill because it leaves too much of ObamaCare in place. But the alternative is to leave all of it in place.

Sen. Dean Heller of Nevada feels the bill’s Medicaid reforms would hurt thousands of his state’s residents and jeopardize his re-election in 2018. But preserving ObamaCare would hurt millions nationwide and his prospects for winning a second term.

Sen. Susan Collins of Maine says the bill won’t “fix the flaws” in ObamaCare. But the alternative would lock those flaws in place, probably forever.

Messrs. Paul and Heller and Ms. Collins are playing politics as if it’s an individual sport, like golf, boxing or gymnastics. In the Senate, only a team can win.


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Is America On The Verge Of Another Debt Ceiling Crisis?

Donald Trump will need to tackle this head-on.


The National Interest
July 17, 2017

The Congressional Budget Office now projects that sometime this October the U.S. Treasury may be unable to continue borrowing on the credit of the American taxpayer. In short, the debt ceiling is back and so is the largest, most predictable crisis in U.S. history.

The debt ceiling is both a signaling device, pointing toward a much greater challenge, and an action-oriented, fiscal tool to bring Washington’s unsustainable spending and borrowing under control.

The U.S. national debt is already excessive. About $20 trillion, it exceeds what the U.S. economy is projected to produce in all measured goods and services (gross domestic product) this year. And the debt continues to grow out of control.

Excessive debt imposes high costs on the nation. It slows economic growth, reducing overall opportunity and wages for Americans. It contributes to policy uncertainty and a reduction in and delay of investments in the nation. And it increases the risk of a financial or national security crisis to which Congress and the president would have a lesser ability to react than if the debt were contained.

Most analysts will refer only to the U.S. debt held by the public, which comprises $14 trillion of the roughly $20 trillion national debt. They do so because public debt is borrowed in credit markets, whereas about $6 trillion of the national debt is held by government agencies, such as the Social Security Administration, which holds about $2.8 trillion of U.S. debt in its old-age and survivors and disability insurance trust funds.

But government-held debt migrates. As debt held by government agencies comes due, it is converted to public debt. For example, bonds currently being held by the Social Security Administration will eventually be traded in for cash to pay for benefits due. Absent substantial tax increases, which would mostly fall on the middle class, paying those benefits would lead to additional borrowing from the public as one type of debt is traded in for another type of debt.

The Congressional Budget Office explains as much in its Long-Term Budget Outlook. The agency projects that the combination of increased spending—especially on federal health care, old-age and disability entitlements—and the conversion from intragovernmental debt to public debt will drive the publicly held debt from 77 percent of GDP this year to 150 percent of GDP at the end of thirty years.

Long-term projections are highly volatile to unexpected shocks. It’s important to note that these projections make no provisions for economic or other crises that could send U.S. debt skyrocketing much sooner and much higher. Few predicted the 2008 financial crisis or expected public debt to more than double as a result. Even without such shocks, all it takes are slightly higher interest rates than are currently anticipated.

Solutions are readily available, yet little action has been taken to avoid this crisis. At the core lies an institutional framework that is inadequate to address the nation’s debt challenge.

The key drivers of federal spending and debt are entitlement programs that operate largely without regular checks on their size and growth. Medicare, Social Security, Medicaid, food stamps and other benefits are part of what are called “mandatory” federal programs. Despite the term, Congress is not required to spend money on these programs indefinitely, nor is it barred from changing them. All the term really means is that, absent legislative correction, these programs grow on autopilot, subject mostly to eligibility criteria set in statute, sometimes decades ago.

There is, however, a statutory spending limit on “discretionary” spending. This category governs defense programs and most domestic programs and agency spending not compassed under the “mandatory” label. These programs are also subject to appropriations as part of the annual appropriations cycle, which requires an active vote to continue spending the following fiscal year.

Mandatory spending is bound by no such checks. This spending goes out the door without Congress having to lift a single finger. In fact, not lifting a finger to control this spending lies at the core of our fiscal challenges.

The debt limit is the one action-oriented, fiscal tool that remains to address the key drivers of our spending and debt. Every major deficit-reduction deal over the past three decades was tied to the debt ceiling. As government approaches the debt ceiling, Congress always debates how to deal with it: Do we change nothing and just vote to raise the ceiling; or do we agree to raise the ceiling only if we agree to rein in current and projected spending?

Given the nation’s perilous fiscal condition, lawmakers must leverage the enhanced focus on debt occasioned by the rapidly approaching ceiling to address the growing U.S. debt crisis in a meaningful way. This means, Congress and the president must adopt a substantial deficit-reduction package before increasing the debt limit again.

One way to accomplish this is to set a firm limit on the growth of all federal spending and to put in place enforcement mechanisms that will automatically keep spending within that limit, should Congress and the president fail to adopt deliberate reforms that accomplish the same goal. Academic and empirical research shows that expenditure limits that target the source of the growth in debt, namely excessive spending, are the most successful in bringing about sustainable budget balance.

President Trump and Congress must work together this summer to develop an expenditure limit that controls spending growth.

The only way to effectively drain the swamp is to tighten the federal spending faucet. Doing so would grow the economy and bring about renewed prosperity, all while reducing waste, abuse and unfairness in federal activities. That’s a prospect the president and Congress should get behind.


Article Link To The National Interest:

Is The Upper Middle Class Really Hoarding The American Dream?

By Robert J. Samuelson
The Washington Post
July 17, 2017

To hear Richard Reeves tell it, the upper middle class is fast becoming the bane of American society. Its members have entrenched themselves just below the top 1 percent and protect their privileged position through public policy and private behavior. Americans cherish the belief that they live in a mobile society, where hard work and imagination are rewarded. The upper middle class is destroying this faith, because it’s impeding poorer Americans from getting ahead.

That conclusion is dead wrong, but it contains just enough truth to seem plausible. We need to separate fact from fiction.

Reeves, a scholar at the Brookings Institution, makes his case in a new book titled “Dream Hoarders,” as in the American Dream. The hoarding refers to all the economic opportunities that the upper middle class is allegedly manipulating for itself. Zoning restrictions segregate it into economically homogeneous neighborhoods, with the best schools. This provides an advantage in getting into selective colleges, leading to better internships and jobs.

All this is self-perpetuating, Reeves says. Class structure is becoming frozen. Downward mobility from the top is limited. Upper-middle-class parents are obsessed with supporting their children, from helping with homework to teaching bike-riding. The story seems so compelling that it could become conventional wisdom. Parents are destiny. Just recently, David Brooks, the influential New York Times columnist, bought into most of Reeves’s theory.

“Upper-middle-class parents have the means to spend two to three times more time with their preschool children than less affluent parents,” he wrote. He also excoriated “the structural ways the well-educated rig the system” — mainly restrictive zoning and easier college admissions, including legacy preferences.

But the facts don’t fit the theory. Reeves defines the upper middle class as households with pretax income from $117,000 to $355,000, representing the richest 20 percent of Americans excluding the top 1 percent (whose status he considers a separate problem). It’s doubtful whether families at the bottom of this range feel rich. For example, a household with two teachers earning average salaries ($56,000 in 2013) would nearly make the cutoff. (Disclosure: Reeves acknowledges belonging to the upper middle class, as do I.)

By Reeves’s arithmetic, the upper middle class — again, a fifth of the population minus the top 1 percent — accounted for 39 percent of income gains from 1979 to 2013, only slightly lower than the 43 percent share of the bottom 80 percent. (The top 1 percent’s share was 18 percent.) This growing income gap is worrisome, because it implies dramatically different life experiences among Americans. The differences “can be seen in education, family structure, health and longevity,” writes Reeves.

But these undesirable trends aren’t caused by a rigid upper-middle-class oligarchy that’s hoarding opportunities for itself. Contrary to Reeves’s argument — but included in his book — is one study finding that among children born into the richest fifth, only 37 percent remained there as adults. Roughly two-thirds dropped out. How much more downward mobility does Reeves want? He doesn’t say.

Similarly, some advantages claimed for the upper middle class are weaker than advertised. Access to the best schools? Sure, but that doesn’t cover all upper-middle-class students. Reeves reports that nearly two-fifths of the richest 20 percent of families live near schools ranked in the top fifth of their states by test scores. But that means that about three-fifths of these wealthier families don’t. It’s also true, as Reeves notes, that the causation works in the other direction: Good students make good schools.

Though economic opportunities abound, the capacity to take advantage of them does not. That, not hoarding, is our real problem. Reeves reports that less than half the students at community colleges “make it through their first year.” Similarly, only 6 out of 10 children raised in top-income families have bachelor’s degrees. If parents are so obsessed with — and controlling of — their children’s fates, why isn’t the share 9 out of 10 or higher?

The irony is that Reeves has the story almost backward. As a society, we should try not to restrict the upper middle class, but to expand it. In general, it’s doing what we ought to want the rest of society to do. Its marriage rates are higher, its out-of-wedlock births are lower, its education levels are higher.

As for parents, why make them feel guilty for wanting to help their children? What are parents for, after all? To be sure, there are (and will be) excesses and examples of undeserved privilege — brats. Life is messy. But let’s not blame the struggle of the lower middle class and poor on the success of the upper middle class. The two are only loosely connected, if at all.


Article Link To The Washington Post:

Trump Is Killing The Republican Party

By Joe Scarborough
The Washington Post
July 17, 2017

I did not leave the Republican Party. The Republican Party left its senses. The political movement that once stood athwart history resisting bloated government and military adventurism has been reduced to an amalgam of talk-radio resentments. President Trump’s Republicans have devolved into a party without a cause, dominated by a leader hopelessly ill-informed about the basics of conservatism, U.S. history and the Constitution.

America’s first Republican president reportedly said , “Nearly all men can stand adversity. But if you want to test a man’s character, give him power.” The current Republican president and the party he controls were granted monopoly power over Washington in November and already find themselves spectacularly failing Abraham Lincoln’s character exam.

It would take far more than a single column to detail Trump’s failures in the months following his bleak inaugural address. But the Republican leaders who have subjugated themselves to the White House’s corrupting influence fell short of Lincoln’s standard long before their favorite reality-TV star brought his gaudy circus act to Washington.

When I left Congress in 2001, I praised my party’s successful efforts to balance the budget for the first time in a generation and keep many of the promises that led to our takeover in 1994. I concluded my last speech on the House floor by foolishly predicting that Republicans would balance budgets and champion a restrained foreign policy for as long as they held power.

I would be proved wrong immediately.

As the new century began, Republicans gained control of the federal government. George W. Bush and the GOP Congress responded by turning a $155 billion surplus into a $1 trillion deficit and doubling the national debt, passing a $7 trillion unfunded entitlement program and promoting a foreign policy so utopian it would have made Woodrow Wilson blush. Voters made Nancy Pelosi speaker of the House in 2006 and Barack Obama president in 2008.

After their well-deserved drubbing, Republicans swore that if voters ever entrusted them with running Washington again, they would prove themselves worthy. Trump’s party was given a second chance this year, but it has spent almost every day since then making the majority of Americans regret it.

The GOP president questioned America’s constitutional system of checks and balances. Republican leaders said nothing. He echoed Stalin and Mao by calling the free press “the enemy of the people.” Republican leaders were silent. And as the commander in chief insulted allies while embracing autocratic thugs, Republicans who spent a decade supporting wars of choice remained quiet. Meanwhile, their budget-busting proposals demonstrate a fiscal recklessness very much in line with the Bush years.

Last week’s Russia revelations show just how shamelessly Republican lawmakers will stand by a longtime Democrat who switched parties after the promotion of a racist theory about Barack Obama gave him standing in Lincoln’s once-proud party. Neither Lincoln, William Buckley nor Ronald Reagan would recognize this movement.

It is a dying party that I can no longer defend.

Pulitzer Prize-winning historian Jon Meacham has long predicted that the Republican and Democrats’ 150-year duopoly will end. The signs seem obvious enough. When my Republican Party took control of Congress in 1994, it was the first time the GOP had won the House in a generation. The two parties have been in a state of turmoil ever since.

In 2004, Republican strategist Karl Rove anticipated a majority that would last a generation; two years later, Pelosi became the most liberal House speaker in history. Obama was swept into power by a supposedly unassailable Democratic coalition. In 2010, the tea party tide rolled in. Obama’s re-election returned the momentum to the Democrats, but Republicans won a historic state-level landslide in 2014. Then last fall, Trump demolished both the Republican and Democratic establishments.

Political historians will one day view Donald Trump as a historical anomaly. But the wreckage visited of this man will break the Republican Party into pieces — and lead to the election of independent thinkers no longer tethered to the tired dogmas of the polarized past. When that day mercifully arrives, the two-party duopoly that has strangled American politics for almost two centuries will finally come to an end. And Washington just may begin to work again.


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