Tuesday, August 1, 2017

Tuesday, August 1, Morning Global Market Roundup: Asia Shares Advance As Investors Look To Data For Proof Of 'Goldilocks'

By Hideyuki Sano
August 1, 2017

Asian shares rose on Tuesday as investors looked to a barrage of economic data around the world to confirm recent signs the global economy is in fine fettle with inflation staying well contained.

Spreadbetters expected a mostly stronger start for European shares, forecasting Britain's FTSE to open 0.5 percent higher, Germany's DAX to start up 0.1 percent and France's CAC to open little changed.

MSCI's broadest index of Asia-Pacific shares outside Japan was up 0.7 percent, led by gains in financials and energy shares and coming within a whisker of last Thursday's heights not seen since January 2008, while Tokyo's Nikkei rose 0.2 percent.

Hong Kong's Hang Seng added 0.7 percent, touching its highest since June 2015, and the Hang Seng China Enterprises index was up 1.8 percent and at its highest since August 2015.

Strong inflows from mainland investors via the stock connect program linking Hong Kong and the mainland are seen to be helping drive the recent rise in Hong Kong stocks.

Australian stocks advanced 0.9 percent on the strength of financials and materials shares.

On Wall Street, the Dow Jones Industrial Average rose 0.28 percent to end at a record high of 21,891.12 but the Nasdaq Composite pulled back 0.42 percent after its recent rallies.

MSCI ACWI, an index of the world's 47 stock markets, logged its ninth consecutive month of gains in July, the longest winning spell since 2003-04, on the back of expectations of solid global economic growth.

On the other hand, softening U.S. inflation in recent months prompted investors to bet the Federal Reserve will adopt a patient approach to further interest rate increases.

"The abundance of cheap money is perhaps a theme that is getting stale. Yet, that is the best explanation you could think of to explain the strength of shares and commodities today," said Yoshinori Shigemi, global market strategist at JPMorgan Asset Management.

The CBOE volatility index, which measures implied volatility of stocks and is often seen as investors' fear gauge, stood near record low levels hit last week, partly as investors sell options to enhance low yields.

"The low level of the Vix is a testament that investors expect 'goldilocks markets' to continue," said Shuji Shirota, head of macro economic strategy group at HSBC in Tokyo.

"Under such an environment, the dollar, which is a safe-haven asset, will continue to decline," he added.

Indeed, besides the United States, recent data from other parts of the world suggest a 'goldilocks' scenario where growth is fast enough to create jobs but not so rapid that it would lead to runaway inflation.

A private survey showed growth in China's manufacturing quickened in July, as output and new orders rose at the fastest pace since February on strong export sales.

South Korea's trade data also showed the country's exports grew at robust pace in July, led by shipments of memory chips and electronic storage devices.

All of these data will be followed by preliminary flash estimates of euro zone gross domestic product at 0900 GMT, and then U.S. spending and manufacturing data, due at 1230 GMT and 1400 GMT respectively.

In the currency market, the euro traded at $1.1832, having risen to as high as $1.1846, its best level since January 2015, with a test of $1.20 within sight.

It has gained almost 15 percent from its January 3 low of $1.0340, which was its weakest level since January 2003, on rising expectations that the European Central Bank will taper its stimulus next year.

The dollar also slipped to a 1-1/2-month low of 110.005 yen, and last stood at 110.18 yen, down 0.1 percent.

The dollar's index against a basket of six major currencies was at 92.878, not far from a 13-month low of 92.784 plumbed overnight. The index had marked its fifth straight monthly decline in July, the longest consecutive retreat since its losing run marked from the end of 2010 through early 2011.

The Australian dollar gained 0.4 percent to $0.8034, helped by the strong Chinese data, ahead of the Reserve Bank of Australia's policy announcement later in the day. The RBA is widely expected to keep interest rates on hold.

The Chinese yuan hit 10-month highs in both onshore and offshore trade.

U.S. political turmoil also weighed on the dollar after U.S. President Donald Trump dismissed his communications director, Anthony Scaramucci, just over a week after naming him to the job.

An administration official said Trump's new chief of staff, retired Marine Corps General John Kelly, who sources said was seeking to impose order and discipline on a White House riven with factions and backbiting, asked for Scaramucci's removal.

Oil prices rose to two-month highs on Monday, on expectations of U.S. sanctions against Venezuela's oil sector after Sunday's election of a constitutional super-body in Caracas, which Washington denounced as a "sham" vote.

Oil prices maintained gains even after the U.S. Treasury Department late on Monday announced sanctions limited only to Venezuelan President Nicolas Maduro.

Brent crude futures traded at $52.81 per barrel after having hit a high of $52.92 on Monday.

Copper rose 0.2 percent to $6,380 per tonne, holding near Monday's two-year high of $6,430 and its 2015 peak of $6,481.

Article Link To Reuters:

U.S. Oil Prices Open Above $50 For First Time Since May, But Headwinds Persist

By Henning Gloystein
August 1, 2017

U.S. oil opened above $50 per barrel for the first time since late May on Tuesday, supported by strong fuel demand, but ongoing high supplies from producer club OPEC kept prices from rising further.

U.S. West Texas Intermediate (WTI) crude futures were at $50.26 per barrel, up 9 cents, or 0.2 percent, from their last close. That marks the first time U.S. crude has opened above $50 per barrel since May 25.

Brent crude futures, the international benchmark for oil prices, were trading up 6 cents, or 0.1 percent, at $52.78 per barrel.

"U.S. gasoline demand climbed to last year's highs and U.S. inventories, notably on the East Coast, declined," said French bank BNP Paribas.

Overall U.S. commercial crude oil stocks have fallen by 10 percent from their late-March peaks to 483.4 million barrels, and seasonally adjusted they are now, for the first time this year, below 2016 levels.

"Fears of a supply overhang have receded after two strong (weekly) stock draws in a row in the U.S.," said Sukrit Vijayakar, director of energy consultancy Trifecta.

The American Petroleum Institute (API) is due to publish weekly data later on Tuesday.

Despite the lower U.S. inventories, there were also signs that global oil markets remained amply supplied, capping further price rises.

"Crude oil prices face multiple headwinds as OPEC struggles (to cut excess supply)," BNP said.

Oil output by the Organization of the Petroleum Exporting Countries (OPEC) has risen this month by 90,000 barrels per day (bpd) to a 2017-high of 33 million bpd, a Reuters survey found, led by a further recovery in supply from Libya, one of the countries exempt from a production-cutting deal.

This comes despite a pledge by OPEC and other producers, including Russia, to cut output by 1.8 million bpd between January this year and March 2018.

Article Link To Reuters:

Trump’s Unused Bully Pulpit

As Reagan proved, there’s nothing as powerful as an Oval Office address.

By William McGurn
The Wall Street Journal
August 1, 2017

Not yet a week after the most extravagant Republican Party botch since the Bill Clinton impeachment, Beltway fingers are still pointing. And why not? The failure to make good on seven years’ worth of ObamaCare repeal promises has many fathers.

Take your pick. Sen. John McCain’s pique. The squishiness of those such as Sen. Rob Portman who voted for repeal when it didn’t matter, and then voted nay when it did. Behind-the-scenes undermining by governors such as Ohio’s John Kasich. A GOP bereft of party discipline.

There is truth to all these. Even so, perhaps the most obvious reason goes almost unmentioned: The Republican bills were unpopular.

This does not mean they were bad bills, notwithstanding the many compromises lawmakers included. It does mean that their merits went mostly unsold to the public. This allowed Democrats and their allies to paint the bills as but the latest Republican attempt to rob from the poor ($800 billion in Medicaid cuts) to give to the rich ($600 billion in tax cuts).

Even more astounding is that as this narrative took hold the president of the United States neglected the greatest bully pulpit of all: the Oval Office.

Notwithstanding his flaws, Donald Trump has proved himself able to connect with voters, especially those who voted for Barack Obama, in a way other Republicans have not. But the Trump White House has yet to recognize the unique punch a formal, televised address from behind the desk of the Oval Office still carries, even in the age of Twitter .

Ronald Reagan’s use of the Oval to push his tax cuts through in 1981 is a textbook example. Yes, the Gipper schmoozed those on the opposite side of the aisle. He had to, given that Democrats controlled the House. But as likeable as he was, folks on both sides of the political aisle were skeptical about his proposed tax cuts.

In a July 27 Oval Office address, Reagan made his pitch. In simple language, he gently mocked the Democratic leadership claims that their bill “gives a greater break to the workers than ours.” He said the whole controversy came down to whose money it was—the people who earned it or the government that wanted to spend it. And his call for Americans to “contact your senators and congressmen” to urge them to vote for his tax cuts touched off what Speaker Tip O’Neill described as a “telephone blitz like this nation has never seen.”

Though it’s now popular to reminisce about the warm cuddly Reagan who put partisanship aside, that’s not the way it was seen at the time. The day after his speech, the New York Times reported Reagan had “engaged in a series of partisan attacks on his opponents on Capitol Hill.”

It worked: Two days later the Democratic House approved the Reagan administration’s tax cuts by a comfortable margin.

What does this mean for Mr. Trump? It’s probably too late now for health care. But it might have been a different story if President Trump had used a televised, White House address to explain that the Republican goal was a bill that would help drive down costs, lower insurance premiums, and undo mandates forcing Americans to buy products they don’t want.

Some suggest Mr. Trump does not have the mastery of detail to pull it off. But a president does not need to be a policy wonk. One big thing he can do is simply to push back on the falsehoods.

Imagine, for example, if Mr. Trump had pointed out that the accusation Republicans were cutting Medicaid was classic Swampspeak: In fact, spending would still go up every year, albeit at a slower rate. For good measure, he might have contrasted the Republican faith in the wisdom of the American people with the admission by a chief architect of ObamaCare that it owed its passage to a “lack of transparency” and “the stupidity of the American voter.”

In fairness, Mr. Trump did make calls, bring in senators and speak at his rallies. Even so, nothing quite matches the prestige of an address from his desk, where the president speaks directly to the entire American people. Unlike his rallies, generally limited to his most ardent supporters, even many of those who detest the president would tune in for a prime-time, Oval Office address.

This is not about blaming Mr. Trump for the failure to repeal ObamaCare. It is about pointing him to a huge presidential asset that went unused in a key contest involving Republican credibility.

Democrats are now gearing up to run the same class narrative against the Republicans on tax reform they did on ObamaCare. If the president wishes to avoid another embarrassment, he might put down his smartphone for a moment and start thinking of how to use the Oval Office to ensure the coming debate on taxes is argued on his terms and not the opposition’s.

Article Link To The WSJ:

Coming Clean: The Great Russian Dirty-Money Caper That Wasn't

One of U.K. police’s biggest money-laundering cases collapses; Cops returned $22 million seized in hunt for ‘Russian’ gang.

By Suzi Ring and Patrick Gower
August 1, 2017

The story coming out of the City of London Police that afternoon was startling.

In the heart of the City, Europe’s financial capital, officers had arrested a broker at the U.K. offices of Archer-Daniels Midland Co. who authorities believed was laundering money for a Russian gang.

Even more tantalizing: it would later come out that at least one of the trading firms said to be involved appeared to have distant links to Russian President Vladimir Putin.

But what seemed like a small victory in Britain’s long struggle against dirty money soon turned into a year-long ordeal of misread clues, unsubstantiated allegations and, ultimately, embarrassing reversals.

The story of how this case came together -- and then blew apart -- is a tale for these byzantine financial times. Like countries around the world, Britain is struggling to combat a global wave of money laundering. Six weeks after the March 2016 arrest, then-Prime Minister David Cameron held a much-watched summit to showcase the U.K. as a leader in tackling corruption. Despite efforts by authorities and banks, an estimated 90 billion pounds ($119 billion) of dirty money courses every year through the U.K. alone.

Even successes in Britain’s fight have come with a catch. Authorities fined Deutsche Bank AG 163 million pounds, only after the bank informed them that it had helped customers transfer about $10 billion of suspicious funds out of Russia through London over a three-year period. It took a 2014 study by the Organized Crime and Corruption Reporting Project to prompt an investigation into an estimated $20 billion moved out of Russia through Europe tied to a network dubbed the Global Laundromat.

Record Seizure

The City of London case in question winds from several obscure trading firms, to the commodities giant ADM, to the Intercontinental Exchange Inc., which operates more than a dozen exchanges and marketplaces, including the venerable New York Stock Exchange.

Authorities seized $22 million -- supposedly one of the biggest hauls of suspect money in City of London police history -- only to realize belatedly they’d done so illegally.

This story is based on court filings, documents and interviews with people involved in the case who asked not to be identified because the investigation has ended and some of the details haven’t been public.

It begins in May 2015, when ICE notified British authorities of potential suspicious trading in the market for oil futures. The activity involved a trading firm registered in the British Virgin Islands, Bunnvale Ltd., and two Russian oil-trading firms that the exchange knew little about -- an immediate red flag for investigators.

‘Innocent Explanations’

Bunnvale was consistently making money on trades with the two firms, according to the ICE report, which was seen by Bloomberg News. While such behavior often arises in front running or money laundering cases, there were potentially “innocent explanations,” ICE noted.

One firm, Merida Oil Traders Ltd., has links to Vladimir Kogan, a businessman once known as Putin’s banker due to his stake in a lender where Putin held personal savings, according to people familiar with the firm. The other, Intoil SA, has links to the Russian billionaire Sergei Kislov. Spokesmen for Kogan and Kislov declined to comment.

An ADM broker seemed to be in the middle of it, ICE told the U.K. Financial Conduct Authority.

And with that, the wheels were in motion. The FCA handed the case to the City of London Police, which opened an investigation in February 2016. One month later, plainclothes police arrested Dzmitry Niadzvetski as he walked into ADM’s office building overlooking the River Thames just after dawn.

Case Unravels

Almost from the start, it began to fall apart. Niadzvetski, who authorities said was Russian, turned out to be British and Belarusian. Police took the unusual step of forcing ADM to write checks to cover $22 million in frozen accounts. Three of the four firms sued, claiming the police had acted illegally. Questions arose about information given by one of the detectives involved to a judge authorizing the seizure.

Through it all, the City of London Police never revealed the identity of the alleged Russian gang. Nor did authorities say what, if any, crimes had been committed.

Finally, after a year of false clues and dry leads, the case was quietly closed.

Niadzvetski said his experience shows “how things can so easily be misjudged.” He added that the case led to “my career and personal reputation being tainted and destroyed by nothing more than spurious ‘circumstantial’ allegations based on erroneous data handling.”

Jasvinder Nakhwal, a lawyer representing Bunnvale and sister company Ticom Management LLC, called police behavior in the case “highly regrettable.” The case seemed to hinge on the firms’ nationalities rather than on hard evidence, the Peters & Peters partner said.

‘Grateful For Clarity’

“It is difficult to understand why the police used an unlawful mechanism to seize our clients’ funds, other than as a means by which to avoid judicial scrutiny of allegations that appear to have been founded more on the fact that the companies are largely Russian than on any evidence,” Nakhwal said.

Spokesmen for ADM and ICE declined to comment, as did a lawyer for Intoil. A lawyer for Merida didn’t respond to requests for comment.

The City of London Police declined to comment beyond confirming the investigation has been dropped. In April, after a court ordered the money be returned, a spokeswoman for the agency said they were “aware this was a test case with no existing legal precedent to follow,” adding that they were “grateful to the court for clarity in this matter.”

The enormity of questionable money flowing through London and the bungled attempt to seize $22 million point to larger problems with authorities tasked with tackling laundering.

“We’ve got hundreds of billions of pounds being laundered through U.K. banks or their subsidiaries around the world and hundreds of millions of pounds worth of property in London being held through suspect funds,” said Murray Worthy, a senior campaigner who works on money-laundering issues for Global Witness, a nonprofit London-based group. He praised new measures designed to combat money laundering but said the U.K., and the City, still have a long way to go.

“So while we’ve seen some very good progress, we’re still a very long way from stopping the U.K. playing that role,” Worthy said.

Article Link To Bloomberg:

Bitcoin’s Civil War: What You Need To Know

Digital currency is set to get a new competitor - itself.

By Paul Vigna
The Wall Street Journal
August 1, 2017

This week, after years of industry infighting, the digital currency bitcoin is set to get a new competitor: itself.

A splinter group of bitcoin developers is launching a new version of the currency with a different configuration, the latest twist in a political quarrel for control over the network that controls bitcoin’s trading.

But the new experiment, known as Bitcoin Cash, is causing confusion as exchanges and brokerages scramble to deal with the new currency.

The new bitcoin is slated to be launched Tuesday, a retaliation against a somewhat controversial July agreement in the industry that concerned expanding the bitcoin trading network. As a result, there will now be two competing versions of bitcoin, both vying for the support of investors, developers, and miners. Miners are companies and individuals that process bitcoin transactions

While bitcoin is known as a currency, its core is software, an open-source project initially supported by volunteers and technology enthusiasts. Because the software is open-source, anybody can copy it and release their own version.

The prospects for the new bitcoin are uncertain, and it isn’t clear who exactly is behind it. A website for Bitcoin Cash says it is backed by a “group of miners, developers, investors, and bitcoin users” who previously were pushing for a split before the July compromise.

One large mining-equipment company, Bitmain, based in Beijing, was spearheading the split effort. The firm is still supporting the July compromise, but said it did “not rule out” supporting Bitcoin Cash, assuming it survives. Additionally, Roger Ver, a prominent bitcoin investor, has been publicly supporting Bitcoin Cash.

Mr. Ver said he didn’t know about Bitcoin Cash until it was announced July 22, but is enthusiastic about its prospects. “I think it fits the original vision of bitcoin,” he said.

One exchange, China-based ViaBTC, which is partially owned by Bitmain, is already allowing users to trade Bitcoin Cash in accounts that would be redeemable once the currency goes live.

In very illiquid trading)—fewer than 1,900 bitcoins over 24 hours—the price of Bitcoin Cash was at 0.0951 bitcoin, or about $266 on Monday morning. Bitcoin was trading at $2,801.

It is unclear what volume and prices will look like once live trading begins, scheduled for 8:20 a.m. Eastern time on Tuesday.

In the meantime, bitcoin exchanges are scrambling to figure how they will either support Bitcoin Cash or won’t, and protect their customer accounts at the same time.

On Thursday, the U.S. exchange Coinbase said in a statement that it wouldn’t support Bitcoin Cash, on the reasoning that it wasn’t clear how long the rebel currency would last and what market value it would have. It advised customers who wanted to access Bitcoin Cash to withdraw their bitcoin before July 31.

Another exchange, San Francisco-based Kraken, conditionally said it would support Bitcoin Cash trading, assuming it was successfully launched, and would credit its customer accounts with an equal amount of Bitcoin Cash.

The group behind Bitcoin Cash is copying bitcoin’s software, adding a couple of new features, and releasing it to the public. It will be an almost identical copy, and anybody who has a bitcoin balance can automatically hold the exact same amount of Bitcoin Cash. The balances from the original to the new version will be copied on a 1:1 basis, and it will exist as of Aug. 1.

Whether or not users get access to the new coin depends. If a user has control over their “wallet,” or online account, they can spend their existing balance anywhere either currency is accepted.

Some wallet services, like Coinbase, act as a custodian for users, meaning the decision on whether an existing balance could be spent on Bitcoin Cash is up to the company.

Whether this new money retains any value or collapses though will depend upon whether exchanges support it, and users adopt it. If they don’t, it could die quickly.

The main difference between bitcoin and Bitcoin Cash is how fast it trades and how many trades can happen in a short amount of time.

On bitcoin, transactions are bundled into blocks that are limited to one megabyte in size, which means the network can process about seven transactions per second.

Bitcoin Cash will have an eight megabyte maximum. It’s an arcane coding issue, but it is the source of a major rift in the industry. On one side: developers who want to expand the system to compete against major payment companies. On the other: miners who prefer the status quo and fear big technology companies could be too dominant if speed and large trades take over.

“I think the idea is ill-advised,” said Eric Lombrozo, a bitcoin developer and co-CEO of startup Ciphrex, “but do not wish them ill.”

Article Link To The WSJ:

Bitcoin's Software Could Be Split To Create A Clone

By Gertrude Chavez-Dreyfuss and Anna Irrera
August 1, 2017

Bitcoin's underlying software code could be split on Tuesday to create a clone called "Bitcoin Cash," potentially providing a windfall for holders of the digital currency.

The initiative is being led by a small group of mostly China-based bitcoin miners - who get paid in the currency for contributing computing power to the bitcoin network - who are not happy with proposed improvements to the currency's technology.

They have initiated what is known as a "fork" - where blockchain, a public ledger of all bitcoin transactions, splits into two potential paths - that is set to be activated on Aug. 1.

A fork, if it goes ahead, would be significant as it could create a new competitor for bitcoin, which remains the oldest and most valuable digital currency. It is not clear if the fork will happen and how much the new coin would be worth.

If the fork goes ahead on Tuesday, anyone owning bitcoins before the split will have access to an equal amount of Bitcoin Cash for free, which they will then be able to trade for fiat currencies - legal tender backed by an issuing government - or other digital currencies.

"This is somewhat like a stock split," said Jeff Garzik, chief executive and co-founder of Bloq, a blockchain company. "You go to sleep with 100 bitcoins and wake up in the morning with 100 bitcoins plus 100 'Bitcoin Cash', a new token."

Bitcoin averted a split two weeks ago, when its software developers and miners agreed to implement a software upgrade called the Bitcoin Improvement Proposal (BIP) 91.

BIP 91 was the first step toward a larger effort to upgrade bitcoin through software called SegWit2x, which would make the network faster at processing transactions, such as payments using the virtual currency.

The miners, a powerful segment of the bitcoin community, represent a network of computer operators who validate information on the blockchain. Since bitcoin is powered by open-source code, any group of coders can use it to create clone coins.

Futures of Bitcoin Cash are already trading on certain exchanges at around $282.40. Bitcoin traded at $2,806.27, according to coinmarketcap.com.

If the fork goes ahead, users will only be able to receive and sell the new token on certain digital currency exchanges and digital wallet providers, as several have decided not to support it, including Coinbase, BitMEX, and Bitstamp.

"We do not want to support any behavior whereby anyone can potentially split the bitcoin blockchain and effectively create free money out of nothing," said Greg Dwyer, head of business development at BitMEX.

Two other large exchanges, Kraken and Bitfinex, said they will allow users to trade Bitcoin Cash and will credit them with the same amount of the new token after the fork, if it goes ahead.

Article Link To Reuters:

Late Credit-Card Payments Stoke Fears For Banks

Average net charge-off rate for large U.S. card issuers increased to 3.29% in the second quarter, its highest level in four years.

By AnnaMaria Andriotis
The Wall Street Journal
August 1, 2017

Credit-card losses are mounting, a reversal from a six-year trend that could be a warning sign for markets and the broader economy.

The average net charge-off rate for large U.S. card issuers—the percentage of outstanding debt that issuers write off as a loss—increased to 3.29% in the second quarter, its highest level in four years, according to Fitch Ratings. The quarter was also the fifth consecutive period of year-over-year increases in the closely watched rate. All eight large issuers, including J.P. Morgan Chase & Co., Citigroup Inc., C 1.51% Capital One Financial Corp. COF 1.42%and Discover Financial Services , DFS 1.13% had increases for the quarter.

The trend, which accelerated in the first half of this year, has started to suppress bank earnings. If consumers’ budgets get more stretched, a pullback in spending could pressure both growth and corporate profits.

While losses are rising, they remain low compared with historical levels and the 10% net charge-off rate they hit in early 2010. Lenders say they aren’t expecting a return to crisis-level losses and the increases are largely a return to normal after a period of abnormal lows.

Still, other bankers have noted the change in direction, a new string of losses in the industry after 24 quarters in which they fell. “The overall environment is deteriorating,” said David Nelms, chief executive at Discover in an interview. It is “not quite as favorable as it was over the past few years.”

In 2010, when credit card write-offs started declining, banks lent mostly to creditworthy borrowers. But starting around 2014 many lenders loosened underwriting standards substantially, turning to subprime borrowers with lower credit scores that brought in higher yields.

That contributed to a new boom in credit-card spending. Card balances nationwide rose 6% over the last 12 months through May, a growth rate that is up from about 1% four years ago, according to the Federal Reserve.

Rising balances, however, have also coincided with the recent loan losses and, analysts note, put a dent in what has been one of the healthiest credit-card markets on record.

The missed payments and increase in losses are having knock-on effects on lenders’ earnings. Many posted double-digit percent year-over-year increases in the money they set aside to cover future card losses.

Discover shares dropped 4% on Thursday, the day after the company reported that it increased loan-loss provisions by 55% and raised guidance for its 2017 overall net charge-off rate. It is “hard in the short term to grow earnings when credit is moving against us,” Mr. Nelms said.

The rising losses are occurring during a time of near record-low U.S. unemployment, which suggests that credit performance could quickly weaken should the jobs situation turn. “That’s a little concerning,” said Michael Taiano, a director at Fitch.

During the first-quarter earnings period, some lenders and analysts pointed to delays in tax refunds as a possible reason for the pickup in card-related losses. But this quarter, charge-offs kept rising for many lenders, giving more credence to worries that consumers are taking on too much debt.

The card market is an indicator of consumers’ ability to pay back their debts. Unlike mortgages, a much broader group of consumers have access to cards. And these accounts can fall low on the priority list of bill payments when household finances get tight.

While overall consumer balance sheets look healthy, according to Federal Reserve data, some numbers suggest they are starting to stretch. Balances are growing faster than purchases charged to retail-store cards from Synchrony Financial and Citigroup Inc.

Card losses in the U.S. are up at most big banks, including those that specialize in subprime lending or store credit cards. The net charge-off rate at Capital One in the second quarter increased more than a percentage point from the year prior. Citigroup’s store card figure increased 0.63 percentage point, while Synchrony’s overall rate rose more than 0.90 percentage point.

Broader consumer figures also point to overleveraging. Non-mortgage consumer debt payments, including credit cards and auto loans, account for the largest share of consumers’ after-tax income since 2009, according to an analysis by Barclays PLC.

So far this year, several card lenders, including Capital One Financial Corp. and Synchrony, have raised projections for charge-offs. Investors are jittery about more revisions.

Alliance Data Systems Corp. , the third-largest issuer of store cards by outstanding balances, had been guiding investors to a full-year 2017 loss rate in the mid-5% range. In July though, it wouldn’t commit to that figure when pressed by analysts on its earnings call. The company also reported a net charge-off rate for cards of 6.2% for the second quarter, up 1.1 percentage points from a year earlier. Its shares plummeted more than 9% that day.

Credit cards also moved to the top of the list of concerns about potential losses in the Fed’s annual stress test of banks in June. It said banks would incur $100 billion in projected credit-card losses in a severely adverse hypothetical recession, tied with commercial and industrial loans. Cards ranked third the year prior.

“We’ve seen an inflection point in credit,” said Charles Peabody, managing director at Compass Point Research & Trading LLC. “It is going to get worse from here.”

Article Link To The WSJ:

Executives Are More Worried About Amazon Than Trump Setbacks

Company came up far more than D.C. on recent earnings calls; Retail giant competes in an increasing slice of the economy.

By Julie Verhage
August 1, 2017

What keeps corporate leaders up at night?

It isn’t the chaos in Washington or rising worker pay. It’s what Amazon.com Inc. is, or could be, doing to their business models, according to a Bloomberg analysis of earnings conference call transcripts.

The expanding online behemoth has morphed from a retail category killer to a much broader enterprise that now competes with everything from high-end grocers to technology developers. It’s safe to say corporate America has taken notice -- and is increasingly concerned about the competition.

Looking at the last 90 days of earnings calls and other corporate events such as investor days, a trend emerges. Amazon comes up a lot. It was mentioned a staggering 635 times over that time frame, while President Trump came up just 162 times and wages were discussed 111, the earnings call data show. It’s become even more pronounced over the past 30 days, with Amazon garnering 165 mentions compared with 32 for Trump and 22 for wages.

The trend holds over the past 12 months, which encompasses the period when Trump pulled off his surprise election victory. Yet, Amazon was mentioned 1,800 times on earnings calls over that span, compared with 1,000 for Trump and 406 for wages.

A representative for Amazon didn’t immediately respond to an email seeking comment.

Amazon typically comes up in discussions about efforts to expand into new business lines in a shifting retail landscape. For instance, on the McDonald’s Corp. second-quarter earnings call this month, Chief Executive Officer Steve Easterbrook pointed to Amazon’s purchase of the upscale grocery chain Whole Foods Market Inc. as an example of how rapidly the food industry is being transformed.

“It just demonstrates how disruptive the business world is and how quickly it moves,” he said.

Executives are also quick to point out partnerships they have with Amazon. Mark Parker, the CEO of Nike Inc., highlighted the shoe manufacturer’s pilot brand-registry program with the retailer on his June earnings call.

“As we do with all of our partners,” he said, “we’re looking for ways to improve the Nike consumer experience on Amazon by elevating the way the brand is presented and increasing the quality of product storytelling.”

Article Link To Bloomberg:

Seed Funding Slows In Silicon Valley

By Heather Somerville
August 1, 2017

The bloom is off seed funding, the business of providing money to brand-new startups, as investors take a more measured approach to financing emerging U.S. technology companies.

Seed-stage financing has been sliding for the last two years, with the number of transactions down about 40 percent since the peak in mid-2015, data show. Dollar investments in fledgling companies have also declined, although less dramatically, dropping more than 24 percent over the same period.

The slowdown comes despite an explosion of interest by wealthy individuals and foreign investors looking to park money in the next big thing.

And it has potentially big implications for Silicon Valley.

Early-stage funding is the lifeblood of a technology ecosystem built on risk-taking. Denied critical resources in infancy, companies can't hope to scale quickly enough to unseat incumbent industries and grow into the next Uber Technologies Inc or Airbnb.

"The reason why startups are disrupting companies in the 21st Century is not because they are smarter. It's because they have capital to do so," said Steve Blank, a serial entrepreneur, startup mentor and adjunct professor at Stanford University.

Early-stage investors, known in Silicon Valley vernacular as seed and angel investors, often act as farm teams do in sports. They provide the first significant money and mentoring to help entrepreneurs prove their technology and hit milestones needed to attract even bigger investments from venture capitalists later on.

But the zeal that prevailed just two years ago has faded. Seed and angel investors completed about 900 deals in the second quarter, down from roughly 1,100 deals in the second quarter of 2016 and close to 1,500 deals during that time period in 2015, according to a report released last month by Seattle-based PitchBook Inc, which supplies venture capital data.

The dollar amount provided by seed and angel investors was $1.65 billion in the second quarter. That's just shy of the $1.75 billion for the same time period of 2016 and down significantly from 2015, which saw $2.19 billion invested into fledgling startups.

(For a look a declining seed funding, see tmsnrt.rs/2h62Rt4)

Veteran seed investors and industry analysts offer a number of reasons for the decline.

They cite concerns over inflated valuations as well as a tepid market for initial public offerings, which provide seed funders a way to recoup their investments. After some much-hyped IPOs such as GoPro Inc, LendingClub Corp and Fitbit Inc lost their sizzle, Wall Street has curbed its appetite for shares in unproven private companies with billion-dollar-plus valuations.

Others blame the rise of technology leviathans for the decline in seed funding deals.

San Francisco seed fund Initialized Capital, for example, has slowed its investment pace to about 20 companies a year, down from 50 to 60 just a few years ago, even though its fund size more than tripled to $125 million, according to managing partner Garry Tan.

Among his concerns: dominant players such as Facebook Inc have amassed so much wealth they can quickly challenge a hot startup, diminishing its value.

"Incumbents just get so much more power, so there are fewer super early-stage opportunities that are very valuable," Tan said. "I can imagine a 20 to 25 percent reduction in valuable investment opportunities."

Fewer, Larger Investments

Funding cycles in Silicon Valley ebb and flow. Several veterans say the decline in seed deals is bound to reverse at some point.

Still, some early-stage investors say they're observing a rethinking of the traditional "spray and pray" approach to seed funding. Instead of putting small amounts of money into lots of startups in the hopes that a few will work out, seed investors are shifting to fewer, larger deals.

The median seed deal is now $1.6 million, according to Pitchbook, up from about $500,000 five years ago. That's more in line with what big venture firms used to invest.

And while data show that about 70 percent of seed-funded companies never make it to the next level, there is no shortage of interest from investors.

About 450 seed funds have emerged in the past few years, according to fund managers, financed by investors as diverse as wealthy individuals, universities, sovereign wealth funds and Chinese family offices and corporations.

The experience of early-stage venture firm Floodgate is typical. Investment partner Iris Choi said the firm's average investment size has about tripled in the last four years, from $1 million on the high end to $3 million.

But along with big bucks come big expectations. Funders betting seven figures want to see a much more mature business than in years past.

The upshot is that some entrepreneurs are finding it harder to get a backer in the very early going, says Allan May, chairman and founder of angel investing group Life Science Angels, based in Sunnyvale, California.

"The bar is now higher to get early-stage financing," May said. "You've got to be further along."

In return for writing bigger checks - and assuming bigger risks - seed investors are also demanding larger ownership stakes in new companies.

Initialized Capital, whose investments include San Francisco-based grocery delivery service Instacart, seeks about a 50 percent stake in startups in exchange for its investments, said Tan, the managing partner.

That's enormous considering other seed funders shoot for stakes closer to the 5 percent to 15 percent range.

But more shares gives seed investors more leverage in future funding rounds when additional investors come on board. Seed funders risk seeing their stakes diluted significantly if they don't take a large ownership from the start, or participate in future funding rounds so they don't get squeezed by other venture capitalists.

Venture Capital's "Train Wrecks"

To be sure, entrepreneurs still have ample opportunity to build the next big company. Launching a startup is cheaper than it has ever been, thanks to tools such as cloud computing that allow small fry to forgo the cost of building a data center. Startup incubator programs have helped too.

Still, quick deals could be harder to come by as seed funds with lackluster performances struggle to raise new funds.

"A lot of these funds didn't perform," said Samir Kaji, senior managing director at First Republic Bank. "They are still around but they aren't writing new checks."

In the last year or so, at least nine seed firms have gone out of business, according to PitchBook.

Veteran Chris Douvos, managing director with Venture Investment Associates, has put more than $250 million into seed funds over the last decade. He estimates that the hundreds of small seed funds that exist currently will dwindle to 40 to 80 in the next year or two.

"All of venture capital's train wrecks happen in slow motion," Douvos said. "The mass of these funds is on the bubble, and what will determine who lives and who dies is to some degree luck."

Article Link To Reuters:

Trump Bump: Court Fights Draw Big Money Into Attorney General Races

By Dan Levine and Lawrence Hurley
August 1, 2017

Four years ago, Frances Broaddus-Crutchfield, 74, gave $500 to the campaign of Virginia's Democratic Attorney General Mark Herring.

This election cycle, the lifelong Democrat who lives on a farm in Powhatan County, Virginia, upped the ante, donating $6,500 so far to Herring's re-election bid. "These are desperate times," she said.

Like many Democratic state attorneys general, Herring has made legal challenges to the agenda of President Donald Trump a priority. He joined with attorneys general in other states to challenge Trump's executive order banning travel to the United States from six predominately Muslim countries and to defend former President Barack Obama's Clean Power Plan, which aims to slash carbon emissions.

Those fights, and the prospect of others, are drawing record amounts of campaign contributions into attorney general races in a number of states, according to campaign finance records and more than a dozen interviews with attorneys general, challengers, political operatives and donors.

Attorneys general, who as the top elected legal officers in each state are charged with defending state agencies from lawsuits as well as initiating litigation on their own, have always helped shape national politics.

But their influence grew during the Obama administration, when Republican attorneys general regularly sued the administration over immigration and the environment. Now, with Republicans controlling the White House and Congress, Democrats are using the same playbook to challenge some of Trump's initiatives in the courts.

Donors from both parties have taken notice and are pouring money into upcoming attorneys general campaigns. In his most recent campaign filings, Herring reported raising about $2.8 million through the end of June - over three times more than he had at this point during his campaign four years ago.

"What I am seeing is a lot of energy," Herring said.

Herring's Republican challenger this November, John Adams, has also done well. A corporate defense lawyer who worked in George W. Bush's White House, Adams has raised about $1.5 million, roughly 26 percent more at this point than the Republican candidate in Virginia had in 2013.

"When I first ran in 2012 I would tell people this is one of the most consequential offices, and people would give me a funny look," said Bob Ferguson, Washington state's attorney general who successfully sued to block Trump's first travel ban. "I don't get that look anymore."

'Sophisticated Investment'

The national fundraising arm for Republican attorneys general, RAGA, announced raising a record $7.4 million in the first six months of 2017, 45 percent more than at this point during the last election cycle in 2015. Republican AGs have filed legal briefs defending Trump's travel ban and other policies.

"The substantive work we are doing helping the Trump administration, but also weighing in on a lot of regulatory issues, is motivating people," said West Virginia attorney general Patrick Morrisey, RAGA's chairman.

Meanwhile, the Democratic AG's counterpart, DAGA, raised about $3.1 million between January and June, DAGA executive director Sean Rankin said, 73 percent more than in the first half of 2015.

DAGA hired full time finance staff for the first time this year, Rankin said, and launched its first candidate recruiting program. "Four years ago people weren't moving at this pace," he said.

To be sure, some donors are motivated by more than simply whether a candidate supports or opposes Trump. C. Boyden Gray, who served as a White House counsel and then Ambassador to the European Union under two Republican presidents, doubled his donation in the Virginia AG's race this year, largely because he thinks Adams has the talent to aspire to even higher office.

But Gray also said he recognizes the growing stature of attorneys general.

"They've upped their game over the last decade," Gray said.

RAGA decided this year to end a longstanding custom to avoid spending money against Democratic incumbents, and DAGA followed suit. Neither committee has yet filed individual donor lists for the first half of 2017; the deadline is Monday.

Republicans currently hold 29 state AG seats across the country. Next year, 32 AG elections are scheduled including the District of Columbia.

In Wisconsin, Republican attorney general Brad Schimel has raised about $454,000 through the end of June, even though he is not up for reelection until November 2018. In his 2014 campaign Schimel had not raised that much until about three months before his election.

A representative for Schimel did not return requests for comment.

Schimel faces Josh Kaul, an attorney who has raised about $175,000 since he launched his run in April. Kaul's law firm, Perkins Coie, served as top election law adviser to Hillary Clinton's campaign last year.

Kaul's campaign has already drawn RAGA's attention, which funded a web site targeting him. RAGA has also funded online ads against Iowa Attorney General Tom Miller, who is expected to run for reelection next year, and set up a website attacking Aaron Ford, a Democratic state senator in Nevada eyeing an AG run in 2018.

In Colorado, four Democrats are currently vying for the AG nomination. The fundraising leader, Phil Weiser, served as a technology advisor in the Obama White House and has raised about $355,000 through the end of June, almost four times more than the Democratic candidate had raised at this point in 2013.

The incumbent, Republican Cynthia Coffman, has disclosed about $40,000 in contributions to her AG committee. However, Coffman is also mulling a run for governor, and it is unclear whether donors are awaiting her decision before they write checks.

Coffman did not respond to a request for comment.

Weiser, who has made fighting Trump the centerpiece of his messaging, says Democratic donors are making a "sophisticated investment" to confront the administration.

"I'm pushing on an open door," Weiser said.

Article Link To Reuters:

Japan's Economy May Be Derailed By A Rising Political Crisis

-- Japanese PM Shinzo Abe is facing a severe political scandal and it's not clear if he can survive the rest of his term, raising questions over the future of Abenomics
-- Abe is now expected to prioritize his image instead of long-awaited structural reforms

August 1, 2017

As the leader of the world's third-largest economy battles an acute crisis of confidence, questions over his future and his namesake economic program loom large.

Public backlash over suspected cronyism on the part of Japanese Prime Minister Shinzo Abe has pushed support for the 62 year-old to under 30 percent — his lowest level ever.

Since May, the Liberal Democratic Party head has been accused of helping Kake Gakuen, an educational institution headed by a longtime friend of Abe's, win approval for a veterinary school in a special economic zone. The PM has denied granting any favors but the affair — his second school scandal this year — still cost the ruling LDP a historic defeat in July's Tokyo assembly election.

Abe's popularity has also been weighed down by general disillusionment with his leadership and issues at the defense ministry: Last week, former Defense Minister Tomomi Inada resigned over concerns she helped conceal records that exposed the dangers faced by Japanese peacekeepers in South Sudan.

The PM is now due to reshuffle his cabinet in a bid to strengthen ratings but it's not yet clear whether he can remain in office until the LDP presidential election in September 2018.

"There is now a real chance that Mr. Abe will be out of office before the next legislative elections," Capital Economics said in a recent note. "Should he leave office, one of the most important questions for investors is whether his plan to revitalize Japan's economy, commonly known as Abenomics, will go down with him."

Reform Momentum Stalled

Fiscal policy, monetary easing and structural reforms make up the three pillars of Abenomics. Tokyo has delivered on the first two, but the latter remains in progress. But as Abe's political clout weakens, reforms are now expected to take a backseat as the embattled leader concentrates on restoring his reputation.

"The scandal is a serious threat to Abenomics because the approval rate fell even before important reforms were implemented," said Kohei Iwahara, economist at Natixis Japan Securities. "The government needs a high approval rate from the citizens to implement the necessary reforms, which could inflict pains to its citizens through job losses."

Indeed, Abe now has less ability to move controversial structural reforms — known as the Third Arrow — through the political process, explained Tobias Harris, Japan vice president at Teneo Intelligence.

"Strong public support gave Abe political capital with which to pursue controversial reforms, but it also made him reluctant to use his political capital lest he risk his public support. Now, with his support falling, it's that much harder for Abe to take risky policy decisions."

Key reforms still pending include changes in the labor market to increase wages and social security incentives to boost female participation in the work force.

As of late, "the Third Arrow has run out of steam with no major reforms on the agenda," Capital Economics said. "As such, while we don't have high hopes for structural reform if Mr. Abe stays in office, nor do we if he were to leave."

Could Abenomics Continue Without Abe?

No stranger to transgressions, Abe cut short his first term in office back in 2007 amid a series of scandals in his cabinet. But even if history repeated itself this time, Abenomics is still expected to survive.

"The same old bottle will simply be relabeled from Abenomics to XXnomics, with XX being the new PM's name," said Iwahara. "Unfortunately, there is no meaningful policy debate in Japan that can be an alternative to Abenomics, so the important ingredients of Abenomics will remain intact."

Should Abe depart before the end of his term, foreign minister Fumio Kishida is likely to be his successor, projected Harris.

"Having served under Abe, Kishida will be hard pressed to abandon Abe's legacy entirely. He has articulated a mild critique of Abenomics focused on inequality issues, but this would lead to a kinder, friendlier Abenomics rather than a decisive break with Abenomics."

Article Link To CNBC:

A Short-Term Correction Looms In The U.S. Stock Market

There are severe overbought conditions

By Lawrence G. McMillan
August 1, 2017

The stock market has been in a slumber since gapping up above a modest downtrend line on July 12.

From July 13 to July 26 — 10 trading days — the VIX VIX, -0.29% closed below 10. On five of those days, the S&P 500 Index SPX, -0.07% closed at a new all-time high. And on seven days, the benchmark index traded at a new intraday record. So the market has been advancing slowly and methodically, but in doing so has created a severe overbought condition, especially in terms of volatility indices. More about that later.

As far as the S&P 500 chart goes, though, it is unabashedly bullish. It continues to make new highs, remaining above the trailing moving averages and holding above support. In fact, July 23’s reversal low near 2,460 points, along with previous lows near 2,465, makes the 2,460-2,465 area a bona fide support area now. Below there, support exists at the old highs of 2,450. Then the most important support area is still at 2,400. Note that a sharp, but short-lived, correction could develop from current levels and still not take out the support at 2,400 — meaning that the intermediate-term outlook is still bullish, per the S&P 500 chart (our most important indicator).

As for upside resistance, there isn’t any in the classic sense, since the S&P 500 is trading at new highs. However, we did have targets of 2,480-2,500 based on the breakouts from previous trading ranges. (The breakout from the 2,320-2,400 range gave us a target of 2,480, and the breakout from the 2,400-2,450 range gave us a target of 2,500.) The S&P 500 has only just recently traded above 2,480, but has yet to close above there.

Furthermore, for the past several days, the S&P 500 has crawled up the +3 “modified Bollinger Band” (mBB). That is not an imminent signal, but if it should close above the +4σ Band, that would set up a sell signal. You can see from the two previous mBB sell signals (marked with the letter “S”) in figure 1 that the market at least stalled out for about four to six weeks after the sell signal. Currently the +4σ Band is at 2,487 — very near the middle of our target range.

So, the S&P 500 chart is positive, but it could be running into a zone where it is going to encounter some trouble continuing the advance.

Equity-only put-call ratios remain bullish. The standard ratio has developed a little “wiggle” over the past few days, but at this point the computer analysis programs are still grading this chart as being on a buy signal. Meanwhile, the weighted ratio continues to make new relative lows daily and is thus solidly on its buy signal at this time.

Market breadth is only mildly bullish. The breadth oscillators have been on buy signals since July 12, but were never able to register the kind of strong overbought reading that we like to see when the S&P 500 is breaking out to new highs. Now, with some recent slowing action in breadth, both of those oscillator buy signals are in jeopardy. Even a day of modestly negative breadth will roll them back over to sell signals. As we’ve noted many times since last November, breadth has just not been strong enough — in either direction (no “90% days,” either “up” or “down” since the election) — to keep these breadth oscillators from flip-flopping back and forth between what have become relatively meaningless buy and sell signals.

A more positive tone is connoted by the fact that the cumulative advance-decline lines have been making new all-time highs, and that is supportive of the S&P 500 new all-time highs. The “stocks only” cumulative A-D line has made new all-time highs on seven days since the last upside breakout by the S&P 500 on July 12.

New highs vs. new lows is also a positive indicator, as new highs continue to dominate new lows. Since that upside breakout on July 12, new highs have averaged 177 per day, while new lows have averaged 16. That is dominance, and it means that this longer-term indicator is still positive.

So now we reach the subject of volatility. It is so low that it has been analyzed, re-analyzed and cross-analyzed by every commentator and media “expert” on TV, radio and the internet. What can one say, besides the fact that when VIX is low, stock prices can continue to rise — and they certainly have. As noted earlier, VIX had recently closed below 10 for 10 consecutive days. That is a record, shattering the previous record of six days, when the “old” VIX VXO, +4.72% was extremely low leading up to, and including, the Christmas holiday in 1993.

VIX closed at new lows for the entire life of this and previous versions of VIX that date back to 1986. That’s a pretty amazing stat right there. Other volatility indices, such as VXO (also dating back to 1986), VIXMO, VXST, etc., have recently traded at, and closed at, new all-time lows.

Short VIX trading systems are having a heyday (one such trader posted his returns through June as +36% year to date — he’s essentially long XIV (the inverse VIX ETF), plus long some bond ETFs). But these are volatile, as XIV was down intraday over 7% just last Thursday, before recovering with the broad market. There are many other variations of “shorting VIX,” and they have all made good money this year. But there are going to be some large drawdowns when VIX reverses. On the other side of the coin are those looking for an explosion in VIX and thus are buying VIX calls or taking other positions designed to profit if VIX takes off.

This is all being driven, of course, by massive selling of SPX puts — lowering their implied volatility (that’s what VIX measures). VIX has traded down to very near the 20-day historical level of SPX itself. That 20-day historical vol is at about 8%, and VIX has been just above 9%. It is unusual to see VIX trade that close to historical vol (usually it’s higher than that), especially at these low levels of volatility. But that’s the way it is, and until something shocks these VIX sellers and SPX put sellers out of their somnambulant state, that’s likely the way it will remain.

Clearly VIX is in an overbought state, but as we all know, overbought does not mean “sell.” So where would we sell? We are still rather arbitrarily using 13 as the demarcation line for VIX. If it trades above there, and especially if it closes above there, the wheels could begin to come off of this bullish stock market bandwagon. Until then, the bulls will have their way. Remember Keynes’ admonition that “the market can stay irrational for longer than you can stay solvent.” After that long period of low VIX in 1993, there was something of a market correction a few months later, but VIX remained below 20 for the most part for another two years after that.

The construct of the volatility derivatives remains bullish, and that is an intermediate-term indicator. The VIX futures are all trading at premiums to VIX (although considering that VIX is so low, one might think those futures premiums should be even larger). Moreover, the term structures of the VIX futures and of the CBOE Volatility Indices continue to slope upward. Those are bullish indicators.

In summary, all of our indicators continue to be bullish, although some (breadth, especially) are not far from rolling over to sell signals. Of this bullish lot, the most important is the chart of SPX, and as long as that is bullish, the intermediate-term outlook is positive. The overbought condition in volatility warns of a sharp, but likely short-lived correction, and that is probably imminent. But that won’t change the intermediate-term picture unless the major support levels of the S&P 500 are taken out.

Article Link To MarketWatch:

Greenspan: No Bubble In Stocks But Look Out When Bonds Pop

Inflation won’t stay at historically low levels, dooming bonds; Fed Model justifies elevated stock valuations for now.

By Oliver Renick and Liz McCormick
August 1, 2017

Equity bears hunting for excess in the stock market might be better off worrying about bond prices, Alan Greenspan says. That’s where the actual bubble is, and when it pops, it’ll be bad for everyone.

“By any measure, real long-term interest rates are much too low and therefore unsustainable,” the former Federal Reserve chairman said in an interview. “When they move higher they are likely to move reasonably fast. We are experiencing a bubble, not in stock prices but in bond prices. This is not discounted in the marketplace.”

While the consensus of Wall Street forecasters is still for low rates to persist, Greenspan isn’t alone in warning they will break higher quickly as the era of global central-bank monetary accommodation ends. Deutsche Bank AG’s Binky Chadha says real Treasury yields sit far below where actual growth levels suggest they should be. Tom Porcelli, chief U.S. economist at RBC Capital Markets, says it’s only a matter of time before inflationary pressures hit the bond market.

“The real problem is that when the bond-market bubble collapses, long-term interest rates will rise,” Greenspan said. “We are moving into a different phase of the economy -- to a stagflation not seen since the 1970s. That is not good for asset prices.”

Stocks, in particular, will suffer with bonds, as surging real interest rates will challenge one of the few remaining valuation cases that looks more gently upon U.S. equity prices, Greenspan argues. While hardly universally accepted, the theory underpinning his view, known as the Fed Model, holds that as long as bonds are rallying faster than stocks, investors are justified in sticking with the less-inflated asset.

Right now, the model shows U.S. stocks at one of the most compelling levels ever relative to bonds. Using Greenspan’s reference of 10-year inflation-adjusted bond yields, currently around 0.47 percent, the gap with the S&P 500’s earnings yield at around 4.7 percent, is 21 percent higher than the 20-year average. That justifies records in major equity benchmarks and P/E ratios near the highest since the financial crisis.

If rates start rising quickly, investors would be advised to abandon stocks apace, Greenspan’s argument holds. Goldman Sachs Group Inc. Chief Economist David Kostin names the threat of rising inflation as one reason he isn’t joining Wall Street bulls in upping year-end estimates for the S&P 500.

While persistently low inflation would imply a fair value of 2,650 on the benchmark gauge, the more likely case is a narrowing of the gap between earnings and bond yields, Kostin says. He is sticking to his estimate that the index will finish the year at 2,400, implying a drop of about 3 percent from current levels.

That’s no slam dunk, as stocks have proven resilient to bond routs so far in the eight-year bull market. While the 10-year Treasury yield has peaked above 3 percent just once in the past six years, sudden spikes in yields in 2013 and after the 2016 election didn’t slow stocks from their grind higher.

Those shocks to the bond market proved short-lived, though, as tepid U.S. growth combined with low inflation to keep real and nominal long-term yields historically low.

That era could end soon, with the Fed widely expected to announce plans for unwinding its $4.5 trillion balance sheet and central banks around the world talking about scaling back stimulus.

“The biggest mispricing in our view across asset classes is government bonds,’’ Deutsche Bank’s Chadha said in an interview. “We should start to see inflation move up in the second half of the year.”

Article Link To Bloomberg:

Banks May Be Hit With $50 Billion Capital Needs After Brexit

Oliver Wyman says lenders will need capital for European units; Need to exist outside U.K. will only grow, consultant says.

By Sarah Jones
August 1, 2017

Banks may need to find $30 billion to $50 billion of additional capital to support new European units in the aftermath of a hard Brexit, according to Oliver Wyman Inc.

The extra money is equivalent to 15 percent to 30 percent of the capital that wholesale banks currently commit to the region, the management consultant said in a report published Tuesday. In addition, operating costs could rise by $1 billion as functions previously handled in London are duplicated on the continent, the company said.

A hard Brexit where banks lose privileged access to the European Union’s single market would “fragment the European wholesale-banking market,” Oliver Wyman partners including Matt Austen and Lindsey Naylor wrote in the report. “It will also make it significantly less profitable. Banks could see two percentage points knocked off their returns on equity.”

Alarmed by the lack of progress on EU exit talks, banks with operations in the U.K. are establishing entities on the continent, with Frankfurt emerging as an early favorite. Lost access to the union could drive as many as 35,000 financial-services jobs from Britain, including up to 17,000 from wholesale banking, Oliver Wyman estimates.

The pressure for banks to boost their operations on the continent will likely build as the European Central Bank’s desire for tougher banking supervision across the euro zone forces lenders to show they’re self-sufficient and have strong governance, according to the report.

“These new challenges from Brexit will raise difficult questions about the viability of some activities,” the partners wrote. “Some banks may even choose to withdraw capacity from the European market as a whole and re-deploy to other regions, such as Asia or the U.S.”

Article Link To Bloomberg:

UK’s Empty Brexit Threats

Since the election, tough talking has been replaced with softer language.

By Annabelle Dickson
Politico EU
August 1, 2017

A threat only works if the person on the receiving end believes you have the ability and the desire to carry it out.

Chancellor Philip Hammond appears to have concluded that the Brussels audience for his own threat — delivered back in January to Germany’s Welt am Sonntag newspaper — now believes that the United Kingdom has neither.

In the heady days of a comfortable (if not generous) House of Commons Tory majority and an opposition in disarray, Hammond said that if the EU gave the U.K. a bad Brexit deal, “we could be forced to change our economic model and we will have to change our model to regain competitiveness.” It evoked images of a Singapore-style low regulation, low-tax economy on Europe’s doorstep.

What a difference a few months and a disastrous election campaign have made.

The tough talking has been replaced with a far more emollient tone. “I often hear it said that the U.K. is considering participating in unfair competition in regulation and tax,” he told Le Monde, innocently. “That is neither our plan nor our vision for the future.”

“I would expect us to remain a country with a social, economic and cultural model that is recognizably European,” he added.

The shift was not due to condemnation from Brussels (European Parliament Brexit coordinator Guy Verhofstadt called it a “counterproductive negotiating tactic”) but the altered political reality at home.

The dream of some Tory Brexiteers of a second Thatcherite big bang to sweep away Brussels-style red tape was quashed by the 40 percent who voted for Labour’s Jeremy Corbyn on June 8.

And the Grenfell Tower disaster, in which more than 80 people died in a social housing tower block fire (the final death toll may not be known for months), has changed the political mood further. Any appetite for the tearing up of red tape dissipated in the wake of the disaster, which appears to have been caused by a catastrophic regulatory failure.

The opposition has also landed some punches on Hammond’s Singapore vision. Labour’s position on the EU single market and customs union may be even more confused than that of the government, but Corbyn’s oft repeated claim that the Tory Brexit deal threatens to create a “bargain basement economy” gained traction in the election campaign and spooked his opponents.

With public frustration for austerity rising, even Tories are no longer in lock-step behind continuing with government spending cuts.

Remember the calls from around the Cabinet table for public sector workers to receive a pay rise just weeks ago?

Hammond is the man who has to balance the books. When those demands started to be made, Hammond knew a Singapore Britain was off the table.

Article Link To Politico EU:

U.S. Sanctions Are Another Gift To Putin

Far from being hurt by them, he finds them useful.

By Leonid Bershidsky
The Bloomberg View
August 1, 2017

Russian President Vladimir Putin tends to respond to Western sanctions in ways its authors probably didn't anticipate: by going after those Russians who could most help their own country and who want to build ties with the West. His order last week to U.S. diplomatic missions in Russia to cut their staff to 455 people -- the exact number of staff that Russia has in the U.S. -- is the latest example.

In 2012, when the U.S. Congress passed the Magnitsky Act, which authorized the government to impose travel bans and asset freezes on Russian officials involved in human rights violations, Russia responded by banning U.S. adoptions of Russian children. The asymmetrical response was preposterous to many Russians, and thousands protested in Moscow. Those children whom no Russians wanted to adopt -- usually those with severe disabilities -- were put up for foreign adoption, and it was mindlessly cruel to deprive them of a chance for a better life. But Russian state TV conducted a major campaign at the time alleging cruel treatment of Russian kids by U.S. adoptive families and stressing national pride. Polls at the time showed about half of Russians supporting the retaliatory bill while less than a third were opposed.

In 2014, in response to Ukraine-related sanctions imposed by the U.S. and Europe, Russia banned the import of a long list of foods from Europe. The effect on European food producers hasn't been major: It was largely offset by export increases to other markets and by immediate European Union support measures for certain countries and sectors. But every time I have visitors from Moscow in Berlin, I watch them stock up on cheese to take home.

People who miss French cheese are a relatively Westernized minority. Most Russians loved another state TV campaign (complete with images of illegally imported food trampled by tractors) that told them the counter-sanctions were good for Russian agriculture. Two-thirds of Russians say the government was right to introduce the food embargo. Only 12 percent contend that it hurts Russians more than the West.

Now that the U.S. Congress has passed a new sanctions package, which codifies and tightens some previously existing restrictions, Putin wants U.S. diplomatic missions -- the embassy in Moscow and the consulates in St. Petersburg, Yekaterinburg and Vladivostok -- to shed staff. There are only about 300 people in the missions who were hired in the U.S.; the rest, more than 900 of them, are local hires, most of them Russians who do technical work. The U.S. will likely choose to keep most of its diplomats (and spies) in place but get rid of the locals. This means the loss of several hundred Russian jobs. But, more to the point, the cuts will almost certainly hurt Russians' ability to travel to the U.S., as former ambassador Michael McFaul pointed out in a tweet.

Even today, a Russian applying for a visitor visa to the U.S. in Moscow must wait 46 days for an obligatory consular appointment. The wait times are considerably shorter in St. Petersburg, Yekaterinburg and Vladivostok, but now they will likely converge toward the current Moscow norm, and in Moscow, people will have to wait long enough to make travel planning impossible.

If Putin wanted his retaliatory measures to be symmetrical, he would have taken into consideration that the Russian consular service in the U.S. issued about 86,000 visas in 2015, while the U.S. missions in Russia issued almost 183,000 visas in fiscal year 2016. But Putin doesn't care about the kind of Russians who want to travel to the U.S. He has repeatedly warned officials and law enforcement officers against going to Western countries where they could be targeted by intelligence services and where their assets could be seized under one set of sanctions or another. Those who still want to go are perceived almost as representatives of a pro-Western fifth column -- just like those hapless cheese-eaters and the minority that believes Russian orphans can have a better life in the U.S. than at home.

This pattern of Russian responses provides an important part of the answer to an often-asked question: Why is Russia preoccupied with Western sanctions despite their obvious inability to achieve stated goals?

It's impossible to know the counterfactual -- what Putin would have done were there no sanctions -- but the sanctions have not deterred him from propping up separatists in eastern Ukraine, holding on to Crimea or allowing cyber campaigns against Western countries to go ahead. Nor do they really hurt his rich friends. There have been no high-profile seizures of their assets since Italy froze $30 million worth of real estate owned by Putin's former judo partner Arkady Rotenberg -- a mosquito bite to the billionaire. Sanctions have also failed to inflict much pain on the Russian economy, which has greatly reduced its debt exposure to Western nations and is working to increase its technological self-sufficiency in key areas such as oil and gas.

But just as the U.S. sanctions were primarily about playing to a domestic audience -- a way to respond to the Trump-Russia scandal -- the Kremlin's response is to use them for domestic fodder. They are held up as proof of "Russophobia" -- Russian officials' favorite term to describe what they see as the unfair treatment of Russia, a desire to curb it rather than cooperate with it. The Kremlin anger isn't a sign of real pain; it's strategic.

Being angry about sanctions strengthens Putin's domestic message about a country surrounded by enemies and undermined by unpatriotic Russians subverted by a hostile West. The anger is aimed largely at the domestic audience and meant to tell it that looking for friends, opportunities or just plain fun in the West is futile, perhaps even hostile to the Motherland.

Article Link To The Bloomberg View:

U.S. Sanctions Are Another Gift To Putin

Oil Markets Escape Venezuela Sanctions For Now

By Devika Krishna Kumar
August 1, 2017

U.S. oil markets had a muted reaction on Monday after Washington slapped sanctions on Venezuelan President Nicolas Maduro but experts say broader oil-sector and financial sanctions may be the only way to make the Venezuelan government feel economic pain.

The move came after Sunday's vote creating a new legislative superbody with the power to dissolve state institutions such as the opposition-run Congress. Countries around the world denounced the vote while Washington called it a "sham."

All of Maduro's assets subject to U.S. jurisdiction were frozen, and Americans are barred from doing business with him, the U.S. Treasury Department said.

Treasury Secretary Steven Mnuchin, when asked about oil sanctions against Venezuela, said the U.S. would consider all options, keeping the possibility of trade flow disruptions alive.

U.S. oil futures CLc1 rose to settle above $50 a barrel on Monday, ahead of a key producer meeting and on expectations that sanctions would include the oil sector. [O/R]

Traders and analysts said the sanctions, in their current state, would not affect oil flows to or from Venezuela.

"The latest sanctions are more symbolic than anything else, as the oil sector remains exempted," said UBS oil analyst Giovanni Staunovo.

The market had expected a likely ban on U.S. exports of lighter crude that Venezuela mixes with its heavy crude.

Other options had included individual sanctions or various measures to restrict the Venezuelan government and state oil company PDVSA's access to the U.S. banking system.

Such moves might help Maduro in the realm of public opinion, said Adam Sieminski of the Center for Strategic and International Studies think tank and former head of the U.S. Energy Information Administration, prior to the announcement.

"If we impose sanctions on Venezuela, we're giving Maduro a scapegoat. He can blame his country's problems on the United States," he said.

Venezuela is a key source of heavy sour crude for U.S. refiners. U.S. imports of Venezuelan crude in the first four months this year averaged 724,000 barrels per day (bpd).

The country has become more reliant on imports for blending due to problems at its refiners, which are running far below capacity. Venezuela took in an average of nearly 87,000 bpd of American-made fuels so far this year.

U.S. refiners such as Valero Energy Corp (VLO.N) and Marathon Petroleum Corp (MPC.N) have been shifting away from processing heavy crudes such as those supplied by Venezuela and other OPEC producers.

Article Link To Reuters:

Venezuela’s Unprecedented Collapse

By Ricardo Hausmann
Project Syndicate
August 1, 2017

In a hastily organized plebiscite on July 16, held under the auspices of the opposition-controlled National Assembly to reject President Nicolás Maduro’s call for a National Constituent Assembly, more than 720,000 Venezuelans voted abroad. In the 2013 presidential election, only 62,311 did. Four days before the referendum, 2,117 aspirants took Chile’s medical licensing exam, of which almost 800 were Venezuelans. And on July 22, when the border with Colombia was reopened, 35,000 Venezuelans crossed the narrow bridge between the two countries to buy food and medicines.

Venezuelans clearly want out – and it’s not hard to see why. Media worldwide have been reporting on Venezuela, documenting truly horrible situations, with images of starvation, hopelessness, and rage. The cover of The Economist’s July 29 issue summed it up: “Venezuela in chaos.”

But is this just another bad run-of-the-mill recession or something more serious?

The most frequently used indicator to compare recessions is GDP. According to the International Monetary Fund, Venezuela’s GDP in 2017 is 35% below 2013 levels, or 40% in per capita terms. That is a significantly sharper contraction than during the 1929-1933 Great Depression in the United States, when US GDP is estimated to have fallen 28%. It is slightly bigger than the decline in Russia (1990-1994), Cuba (1989-1993), and Albania (1989-1993), but smaller than that experienced by other former Soviet States at the time of transition, such as Georgia, Tajikistan, Azerbaijan, Armenia, and Ukraine, or war-torn countries such as Liberia (1993), Libya (2011), Rwanda (1994), Iran (1981), and, most recently, South Sudan.

Put another way, Venezuela’s economic catastrophe dwarfs any in the history of the US, Western Europe, or the rest of Latin America. And yet these numbers grossly understate the magnitude of the collapse, as ongoing work with Miguel Angel Santos, Ricardo Villasmil, Douglas Barrios, Frank Muci, and Jose Ramón Morales at Harvard’s Center for International Development is revealing.

Clearly, a 40% decline in per capita GDP is a very rare event. But several factors make the situation in Venezuela even bleaker. For starters, while Venezuela’s GDP contraction (in constant prices) from 2013 to 2017 includes a 17% decline in oil production, it excludes the 55% plunge in oil prices during that period. Oil exports fell by $2,200 per capita from 2012 to 2016, of which $1,500 was due to the decline in oil prices.

These are huge numbers, given that Venezuela’s per capita income in 2017 is less than $4,000. In other words, while per capita GDP fell by 40%, national income, inclusive of the price effect, fell by 51%.

Countries typically cushion such negative price shocks by putting aside some money in good times and borrowing or using those savings in bad times, so that imports need not decline by as much as exports. But Venezuela could not do that, because it had used the oil boom to sextuple the foreign debt. Profligacy in good times left few assets to liquidate in bad times, and markets were unwilling to lend to an over-indebted borrower.

They were right: Venezuela is now the world’s most indebted country. No country has a larger public external debt as a share of GDP or of exports, or faces higher debt service as a share of exports.

But, like Romania under Nicolae Ceauşescu in the 1980s, the government decided to cut imports while remaining current on foreign-debt service, repeatedly surprising the market, which was expecting a restructuring. As a consequence, imports of goods and services per capita fell by 75% in real (inflation-adjusted) terms between 2012 and 2016, with a further decline in 2017.

Such a collapse is comparable only to that of Mongolia (1988-1992) and Nigeria (1982-1986) and bigger than all other four-year import collapses worldwide since 1960. In fact, the Venezuelan numbers show no cushioning whatsoever: the decline in imports was almost equal to the decline in exports.

Moreover, because this administratively imposed import decline created shortages of raw material and intermediate inputs, the collapse in agriculture and manufacturing was even larger than that of overall GDP, slashing almost another $1,000 per capita in locally produced consumer goods.

Other statistics corroborate this dire picture. Non-oil tax revenues declined by 70% in real terms between 2012 and 2016. And accelerating inflation caused a 79% real decline in the banking system’s monetary liabilities in the same period. Measured at the black-market exchange rate, the decline was 92%, from $41 billion to just $3.3 billion.

Inevitably, living standards have collapsed as well. The minimum wage – which in Venezuela is also the income of the median worker, owing to the large share of minimum-wage earners – declined by 75% (in constant prices) from May 2012 to May 2017. Measured in dollars at the black-market exchange rate, it declined by 88%, from $295 per month to just $36.

Measured in the cheapest available calorie, the minimum wage declined from 52,854 calories per day to just 7,005 during the same period, a decline of 86.7% and insufficient to feed a family of five, assuming that all the income is spent to buy the cheapest calorie. With their minimum wage, Venezuelans could buy less than a fifth of the food that traditionally poorer Colombians could buy with theirs.

Income poverty increased from 48% in 2014 to 82% in 2016, according to a survey conducted by Venezuela’s three most prestigious universities. The same study found that 74% of Venezuelans involuntarily lost an average of 8.6 kilos (19 pounds) in weight. The Venezuelan Health Observatory reports a ten-fold increase in in-patient mortality and a 100-fold increase in the death of newborns in hospitals in 2016. And yet President Nicolás Maduro’s government has repeatedly turned down offers of humanitarian assistance.

The Maduro government’s all-out attack on liberty and democracy is deservedly attracting greater international attention. The Organization of American States and the European Union have issued scathing reports, and the US recently announced new sanctions.

But Venezuela’s problems are not just political. Addressing the unprecedented economic catastrophe that the government has caused will also require the concerted support of the international community.

Article Link To Project Syndicate: