Reuters: Turn out the lights, China oil refining party over.

The decision by state-controlled giant PetroChina to put off two new refineries and delay expansion of another is the latest, most dramatic signal that China's refined fuels capacity has expanded too fast. 

While China will no doubt continue to build refineries, the pace is likely to slow over the next few years, and new units will have to compete with other projects to secure funding.

This means refining economics will have to improve to justify the expense of building and operating costly plants.

Refiners are now travelling the same road large, global miners were forced onto in 2011, when investors caught on to the fact that endlessly adding to the supply of commodities when China's appetite was starting to taper wasn't a profitable idea.

Some may argue it took them too long, but eventually companies like BHP Billiton , Rio Tinto and Anglo American publicly announced they were reining in spending, cutting costs and returning more to shareholders.

Those three companies also changed chief executives, dumping dealmakers for operators as the focus shifted from expansion to running mines and other assets as efficiently as possible.

While executives at the state-run Chinese refining giants PetroChina and Sinopec <0386.HK><600028.SS> are unlikely to lose their jobs, they are likely to be reviewing their expansion plans and re-assessing where their priorities lie.

PetroChina's decision to delay by two years the start-up of its 200,000 barrels-per-day (bpd) Kunming refinery to 2016, and the four-year delay to the 400,000 bpd joint venture Jieyang refinery to 2017 may be part of the process.

The company will also delay the expansion of its Huabei refinery to 2015 from this year.

A joint venture with Royal Dutch Shell and Qatar Petroleum to build a 400,000 bpd refinery in Taizhou also appears to have stumbled, with the Anglo-Dutch multinational reported to have pulled out.
China added about 250,000 bpd of refining capacity in 2013, and two refineries with a combined 440,000 bpd are scheduled to start up in the first quarter of 2014. [ID:nL3N0KN1F8]

This will take total capacity to about 12.7 million bpd, with a further 3.16 million bpd still planned by 2020.

Yet, China's implied oil demand rose at the slowest rate in more than two decades in 2013, gaining just 1.6 percent to 9.78 million bpd.

This would mean that by the middle of this year there could be already close to 3 million bpd of refining capacity not being used, and it's unlikely that demand will rise fast enough to justify the planned refineries.

CNPC, the parent of PetroChina, did forecast a rebound in oil demand in 2014, tipping 4 percent growth to about 10.36 million bpd, which equates to a gain of 400,000 bpd.

Assuming that 4 percent growth is the new normal for China, this would put oil demand at just above 13.1 million bpd by 2020, when refining capacity is slated to be closer to 15.7 million bpd.

That 4 percent growth figure for each year of the next seven may also be optimistic, given China's economic growth rate is expected to ease as the country tries to rotate from being reliant on fixed-asset investment to consumer spending.

Source: By Clyde Russell, Reuters

Emerging Markets with Competitive Advantage

These days, the biggest threat to growth in emerging markets is probably financial markets. While investors are right to reconsider their blind enthusiasm for all countries with low incomes and grand prospects, blind pessimism would harm countries which could really benefit from foreign help.

The three countries currently under the most market pressure deserve to be punished. Argentina and Venezuela have had unsound economic policies for years. Turkey had a current account deficit of over 7 percent of GDP in 2013 and the currency weakened 22 percent against the dollar in the past year, helping to push the inflation rate up to 7.4 percent.

However, some emerging markets really are emerging. Take Nigeria, long written off as an oil exporter beset by poverty, corruption and mismanagement. Its GDP grew at a 6.8 percent annual rate in the third quarter of 2013, with the non-oil sector growing 8 percent. Inflation is modest, and the country consistently runs a surplus on its current account. What's more, the past record is probably better than the published statistics suggest. The first substantial revision of the country’s statistics since 1990 will be published in a few weeks. According to the National Statistics Agency, it is expected to show Nigeria’s GDP is 65 percent higher than previously thought.

Sri Lanka is another country on the rise, despite ranking 91st, just above India, on Transparency International's Corruption Perceptions Index. The International Monetary Fund expects more than 6 percent annual GDP growth between 2013 and 2015, with inflation below 10 percent. While the current account and government budget are showing deficits of around 5 percent of GDP, the ratio of sovereign debt to GDP, raised by its lengthy civil war, is now below 80 percent of GDP and declining steadily.

Mexico is a more familiar investment story, but well worth retelling. Commodities account for only 20 percent of exports, and the country has just undertaken an opening of its oil sector, after keeping it fully domestic and not very efficient for 75 years. Government finances are strong, and the policy interest rate is above the inflation rate - a more sensible relationship than many developed markets can manage. The IMF recently raised its GDP growth projections for Mexico to 3.0 percent in 2014 and 3.5 percent in 2015, with manufacturing buoyed by a quickening U.S. recovery.

For all developing countries, the low wages which keep people poor can be a competitive advantage. The trick is find ways to turn unskilled labour into competitively priced exports. New shipping and communications technologies have made that easier, and some countries have been able to reduce the drag from inefficient institutions and wasteful governments. Indeed, Mexico has lower budget deficits, less debt and higher real interest rates than the major economies of the developed world, not to mention the benefits of North American Free Trade Area.

The catch for many poor countries, especially those with few natural resources and small pools of domestic savings, is their need for outside capital to finance the investments which make rapid growth possible. They can simply lack the funds needed to build infrastructure and production facilities up to a global standard.

When poor countries are closed out of global capital markets, as many were in 2008-09, even sound emerging markets suffer badly. A similar investor freak-out is a serious risk right now. But where there is folly there is also opportunity. Smart investors will be able to pick up some emerging bargains.

Source: Reuters

Japan's top three banks poised to benefit from spurt in domestic loan growth

Japan's biggest banks, flush with cash from a year-long stock market rally, are poised to benefit this year from a spurt in loan growth at home fuelled by the economic stimulus measures of Prime Minister Shinzo Abe.

Mitsubishi UFJ Financial Group Inc <8306.T>, Mizuho Financial Group Inc <8411.T> and Mitsui Sumitomo Financial Group Inc <8316.T> all booked increased lending in the latest quarter, in a business that contracted before "Abenomics" kicked in at the beginning of 2013.

Domestic loans at major Japanese banks grew 2 percent in December for the quickest annual pace since 2009 and surpassed 200 trillion yen for first time in over three years, central bank data show.

Lending is likely to pick up as around a quarter of Japanese companies, according to a Reuters poll conducted last month, plan to increase capital expenditure in the financial year beginning in April. 

In further positive signs, the central bank's index of business sentiment reached its highest in six years in the latest quarter, and spending on machinery hit a five-year high.

Lending growth so far has been driven by funding for large-scale acquisitions. MUFG is part-financing drinks maker Suntory Holdings Ltd's  $13.6 billion purchase of U.S. whiskey maker Beam Inc .

Other primary customers include utilities such as Tokyo Electric Power Co who want funds to buy fossil fuels, as nuclear plants are closed while the nation debates their safety.
Banks spent the majority of 2013 booking significant gains from stocks, as share prices reached multi-year highs lifting banks' income from stock trading and brokerage commission. 

Overall net profit at MUFG increased 47.5 percent to 785.4 billion yen in April-December. 

Net interest income, or profit from interest on loans, grew to 1.39 trillion yen in April-December, from 1.31 trillion yen a year earlier.

The domestic corporate loan balance of MUFG grew 500 billion yen, or 1.23 percent, over three months to 41 trillion yen at December-end.

The earnings mirrored those of Mizuho and SMFG, where 9-month profit rose 43.7 percent and 28 percent respectively. 

At Mizuho, domestic loans reached 55.8 trillion yen at December-end from 55 trillion three months earlier.

Domestic loans edged up to 48.5 trillion yen at SMFG from 47.8 trillion yen during the same period.

Source: reuters

Indonesian minerals ban bites as well as barks: Home

Indonesian minerals policy is rarely a straightforward affair and so it proved again in the run-up to the Jan. 12 ban on exports of unprocessed ores.

There was plenty of last-minute drama, particularly concerning the treatment of copper concentrates. These were first unexpectedly included in the ban and then granted an eleventh-hour presidential exemption, but with an equally unexpected caveat of rising export taxes.

One of the expected restraints on Indonesian policy-makers was the likely flow-through impact from the ban on a local mining industry that is a major employer and a major revenue generator for the country.

There was no shortage of dire warnings about mass lay-offs and mine closures if the ban went ahead. Given the somewhat parlous state of the Indonesian economy, there was widespread scepticism that the government would really want to kill off large parts of its resources sector.

Yet not only did the authorities go ahead anyway, but it is becoming clear that they are fully prepared to countenance the short-term pain for the longer-term gain of forcing the mining sector down the value-added processing path.

The proof comes in the form of the mines ministry's forecasts for minerals production this year. [ID:nL3N0L337H]

Output of both bauxite and nickel ore, key export streams to processing industries in China, are expected to collapse.

Nickel ore output is seen slumping from 60 million tonnes in 2013 to just 3.5 million tonnes this year. Bauxite production is expected to contract even more dramatically from 56 million tonnes to just one million tonnes.

Copper production is expected to rise from 450,000 tonnes to 640,000 tonnes, although ironically it is the copper market that is experiencing the most immediate impact from the ban.
Both Freeport and Newmont thought their existing contracts of work shielded them from future changes to Indonesian minerals policy.

Now, however, they face the prospect of rising export taxes on concentrate shipments and a complete ban from 2017.

Both have said they intend to engage with the authorities with a view to finding, to quote Freeport Chief Executive Richard Adkerson, a "mutually agreeable resolution". 

But in the interim both have suspended concentrate shipments and, unless a deal can be reached pretty quickly, both will have to start trimming output rates.

Analysts at Barclays Capital estimate that the shipping cessation could already have cost the market 45,000 tonnes in supply in January.

Source: Reuters

In trickle-down Abenomics, some Toyota suppliers come up dry.

Toyota Motor Corp  is one of the conspicuous success stories of Japan's radical efforts to revive its economy, with profits rebounding and its 60,000 workers in Japan hoping this year to receive their first base wage rise in six years.

But when the carmaker reports on Tuesday quarterly profits that are likely to be nearly five times what it booked a year ago, its continued revival will mask a much less optimistic mood among the auto industry's smaller firms.

For them, the reflationary economic policies of Prime Minister Shinzo Abe, dubbed "Abenomics", have failed to trickle down beyond the big carmakers, which are actually continuing to squeeze their networks of suppliers.

Pay rises are the last thing on their minds.

"Behind the recovery at the big carmakers is their pressure on suppliers to cut parts prices. It's been hitting us like a body blow," said a senior executive of a company that makes drivetrain-related parts for a major Toyota supplier.

At this small company based in Aichi prefecture, home to Toyota and much of its supply chain, orders have yet to recover from the global financial crisis, and profitability has actually fallen. Operating profit margin has fallen to below 2 percent from around 5 percent in 2008, largely due to pressure to cut parts pricing, said the executive.

Like other suppliers interviewed for this story, the executive declined to be identified for fear of jeopardising the firm's position in Toyota's supply chain.

Toyota did not comment on details about pricing and cost arrangements with its suppliers.
Toyota is under political pressure to raise wages as its union is set to demand a 1 percent base pay rise, which would be a modest hike by international standards but represent a watershed for Toyota workers who earn less every month on average now than they did a decade ago.

However, a Toyota wage rise would not necessarily represent a triumph for Abenomics - a mix of fiscal spending, economic reform and monetary stimulus designed to pull Japan out of a decades-long slump - in the broader auto industry.

Lower down the supply chain, many companies, especially the smaller ones, are unlikely to be able to raise base wages, partly because of the price and cost-cutting pressure. And given that the minnows of the industry account for the bulk of its jobs, that could be worse than a zero-sum game.

Source: Reuters

Reuters: Wall Street suffers worst drop since June after weak data

U.S. stocks slumped on Monday, with the S&P 500 suffering its worst drop since June, after weaker-than-expected data on the factory sector in the world's largest economy provided investors with the latest reason to move away from riskier assets.

U.S. manufacturing grew at a slower pace in January as new order growth plunged by the most in 33 years, while spending on construction projects barely rose in December. 

Investor sentiment soured sharply after the factory data, driving the cost of protection against a drop on the S&P to its highest level in nearly four months. The CBOE volatility index <.VIX> jumped 16.5 percent to 21.44, its highest level since December 2012.

S&P e-mini futures <ESc1> showed 2.999 million contracts traded for the session, the largest volume since Feb. 25, 2013.

"Nothing is preserved today - once the market started selling off, that was that," said Keith Bliss, senior vice-president at Cuttone & Co in New York.

The Dow Jones industrial average  fell 326.05 points or 2.08 percent, to 15,372.8, the S&P 500 <.SPX> lost 40.7 points or 2.28 percent, to 1,741.89 and the Nasdaq Composite  dropped 106.919 points or 2.61 percent, to 3,996.958.

The Dow closed below its 200-day moving average for the first time since Dec. 28, 2012, a technical breakdown which could indicate further declines.

Selling was broad-based, with only nine components in the S&P 500 trading in positive territory. Telecoms <.SPLRCL>, down 3.7 percent, and consumer discretionary <.SPLRCD>, down 2.7 percent, were among the worst performing sectors.

The Dow Jones Transportation average  dropped 3.2 percent.

Stocks have been pressured as the Federal Reserve confirmed its commitment to withdrawing its market-friendly stimulus and by concern about growth in China. China's service-sector growth slowed to a five-year low in another sign of stuttering momentum in the world's second-largest economy. 

Investors have also become leery about the outlook for emerging markets, where a recent rout in currencies spurred some central banks to raise interest rates or intervene in markets to limit the swings. That, in turn, has pressured bond and stock holdings and forced investors to exit in favor of assets perceived as relatively safe, like the yen and Swiss franc.

"This is the best evidence yet, to me, that people knew the Fed’s monetary policy in 2013 was doing nothing but providing a definite floor to the equity markets. As soon as they started signaling they were going to pull out of their extraordinary stimulus you saw the unintended consequences," said Bliss.

For January, the Dow tumbled 5.3 percent and the S&P 500 slid 3.6 percent - their worst monthly percentage declines since May 2012.

With earnings season halfway over, Thomson Reuters data shows that of the 250 companies in the S&P 500 index that have reported earnings, 69.7 percent have topped expectations, above both the 63 percent beat rate since 1994 and the 67 percent rate for the past four quarters.

Telecoms were weaker on speculation AT&T Inc's <T.N> plan to cut prices on its large shared data plans could prompt other U.S. carriers, particularly larger rival Verizon Wireless <VZ.N>, to offer new discounts. AT&T lost 4.1 percent to $31.95 and Verizon lost 3.4 percent to $46.41. 

Charter Communications Inc  is discussing raising its bid for Time Warner Cable Inc , according to people familiar with the matter, a move that could pressure its reluctant rival ahead of a proxy deadline. TWC shares added 0.5 percent to $134.01. 

Britain's Smith & Nephew <SN.L> is to buy ArthroCare Corp <ARTC.O> for $1.7 billion in cash to strengthen its treatments for sports injuries, an area growing faster than its main replacement hips and knees business. ArthroCare shares rose 8.2 percent to $49.12. [ID:nL5N0L80N6]

Pfizer's <PFE.N> shares edged up 0.7 percent to $30.60, the only Dow stock to close higher. Pfizer's experimental breast cancer drug significantly delayed progression of symptoms in a mid-stage trial, meeting the study's primary goal. 

Volume was heavy, with about 9.46 billion shares traded on U.S. exchanges, well above the 6.94 billion average in January, according to data from BATS Global Markets. Volume was 8.84 billion on Jan. 24, the last session the S&P 500 fell more than 2 percent.

Declining stocks outnumbered advancing ones on the NYSE by 2,610 to 463, while on the Nasdaq, decliners beat advancers 2,286 to 368.

Commodities: WSJ:Dr. Copper’s Long, Boring Slide Is One for the Record Books

  The Wall Street Journal reports,"copper fell for a ninth session, locking in the longest losing streak since December 1995.

You’ll be forgiven for missing it.

The current decline has featured exactly one interesting trading day–the 1.5% decline on Jan. 23 after data showing manufacturing in top consumer China contracted.

The market has drifted lower since, notching an average daily drop of 0.4% in low volume as Chinese traders packed up and eventually left for a weeklong holiday.

“It’s been more of a kind of erosion” than a dramatic selloff, said Stephen Platt, a futures strategist with Archer Financial Services. “Chinese demand is not coming on as strong as it once was, undermining the market.”

Traders say the looming absence of the market’s largest buyer helped drive the retreat, and could keep prices under pressure until markets there reopen on Thursday.

Granted, there’s nothing keeping a Chinese copper importer from picking up the phone to take advantage of the 5% drop in prices before then. But buyers may not yet see a bargain in the lower copper price.

Supply is set to exceed demand in the global copper market in 2014 for a second year, and traders may have to contend with a slowing China as well as questionable demand from emerging markets.

After today’s weaker U.S. manufacturing data, copper fell 0.4%, again, to $3.1835 a pound, a two-month low.

WSJ: Red Alert on Russia Is Premature

         According to a report from the Wall Street Journal, "Russia hasn't escaped the recent emerging-market turmoil. The ruble has been a poor performer, falling some 7% against the dollar this year. And with investors wondering whether the turmoil in countries such as Turkey could lead to wider systemic problems, Russia presents a potential cause for concern, both because of its size and turbulent history".

  Russia has come a long way since 1998, however, when its default led to the implosion of U.S.-based hedge fund Long Term Capital Management, which reverberated through Wall Street. Russia ran a current-account surplus of 1.5% of gross domestic product in 2013 and a budget deficit of just 0.5% of GDP.

Reserves are solid at $497 billion. And the country hasn't been a magnet for hot-money inflows. From mid-2009 to the end of 2012, when emerging markets were a favorite destination for investors, portfolio inflows were just 1% of GDP, according to Morgan Stanley, versus 10% of GDP for Turkey.

Not that Russia is without issues. Two loom large: its relatively lackluster economic prospects and unfortunately timed push to liberalize its foreign-exchange system.

The current-account surplus has shrunk and may yet turn into a deficit. Growth has slowed since the global financial crisis and was just 1.5% in 2013. Despite that, inflation is proving tricky to bring down to target. Some Russian officials warn the country faces stagflation. Russia remains reliant on oil and gas revenues and it still hasn't done enough to attract investment that might help diversify its economy.

Russia also is unlucky in that it has chosen now to increase exchange-rate flexibility, with the aim of moving to a floating-rate system by 2015. In the long term, this is likely to be a positive development. But changes to the relatively complex system, which couples a moving currency band with interventions at preset thresholds, may be adding to the pressure on the ruble and increasing volatility.

Moreover, if the ruble continues to fall steeply, it could cause tensions in a country that has seen repeated painful currency crises. In 1998, when Russia defaulted, the ruble lost 70% of its value against the dollar; in 2008-2009, it lost 55% against the dollar, according to RBS.

The move this year in the Russian central bank's ruble band against the euro and dollar is the fastest since 2009 and may evoke memories of those previous devaluations for the population, notes RBS. A big threat to the ruble could yet lie in a surge in demand by Russians for foreign currency.

Russia's central bank,has a tricky task. Slow growth means it is unlikely to want to raise rates, but currency weakness could prove inflationary. One option is for the central bank to pause in its progress toward a free-floating ruble. If the pressure increases, that might be a handy safety valve.

  Investors mindful of Russia's importance to emerging markets are right to keep a sharp eye

on its currency

WSJ: Commodities, Winter Is Coming

           According to a report from the Wall Street Journal,"last year was, on average, another one to forget for investors in raw materials: The Dow Jones- UBS  Commodity index fell 10% against a 24% increase in the MSCI World Index of stocks. But those trends reversed in January. The MSCI index finished the month down 3.7%, while the DJ-UBS index eked out a slight gain".

But as rallies go, this one is at best a two-horse race. It is fortunate for investors in the DJ-UBS that its biggest component, weighing in at nearly 14.5%, is U.S. natural gas. Near-term gas futures returned about 18% in January amid America's big freeze.

Coming in a distant second, adjusted for its weighting in the index, is gold. After a dreadful 2013, when gold returned a negative 29%, it added 3% in January as fears around emerging markets took hold. As the third-largest component in the DJ-UBS index, that adds an appreciable bump, even if much smaller than that of gas.

While another seven commodities have gained so far this year, mostly agricultural, their weightings are all so small that they barely move the needle. And then there are 13 that have all fallen, including some index heavyweights like oil and copper.

Despite being in the green, therefore, the underlying message of the DJ-UBS so far in 2014 isn't encouraging.

Cold weather is, after all, transient. Despite more heavy snow hitting the Northeast Monday, gas futures were down. The near-month contract has fallen by about 10% since the middle of last week and longer-term futures remain flat. Gold, meanwhile, could continue benefiting from the fear trade. But it faces a sizeable and continuing headwind in the shape of the Federal Reserve scaling back its bond-buying program.

Those commodities tied more closely to global economic activity—oil and industrial metals—add up to almost 42% of the DJ-UBS index and, nickel's slight gain aside, are uniformly in the red. Worries about emerging markets, especially China's soft economic indicators—weak again on Monday—clearly weigh heavily. But so does fear of supply outpacing demand as the lagged effect of earlier investment catches up for the likes of oil and copper.

  

Pullback in US stock markets is not unexpected

Doug Cote, chief investment strategist at ING Investment Management, says the pullback is not unexpected.

The reason we are seeing a sharp selloff today is because the dismal ISM numbers came at a vulnerable time for the markets. There is a cascade of uncertainty while tapering is on, as it should be. 

Markets need corrections from time to time and this well may turn to be one. At the moment we would call this a meaningful pullback.

We will be watching Thursday’s ECB meeting and Friday’s jobs number very closely.

US Stock Markets Plunge

The Dow falls below its 200-day moving average, for the first time since October. 

Here’s the damage at the close, according to preliminary FactSet data:

Dow dives -2.1%

SPX falls -2.3%

Nasdaq slides -2.6%

Doug Cote, chief investment strategist at ING Investment Management, says the pullback is not unexpected.

The reason we are seeing a sharp selloff today is because the dismal ISM numbers came at a vulnerable time for the markets. There is a cascade of uncertainty while tapering is on, as it should be. 

Markets need corrections from time to time and this well may turn to be one. At the moment we would call this a meaningful pullback.

We will be watching Thursday’s ECB meeting and Friday’s jobs number very closely.

           Source: Marketwatch 

Earnings Weigh on Europe Stocks

        According to a report from the Wall Street Journal, "European stocks slumped Monday, despite broadly positive manufacturing data across the euro zone, after a spate of lackluster earnings.

The Stoxx Europe 600 was 1.34% lower, continuing January's slide. Last month, the index posted its worst monthly loss since June 2013".

Several major European companies gave disappointing earnings reports Monday.Lloyds Banking Group's shares fell sharply after it announced it will start to pay dividends later than analysts had expected, and set aside a £1.8 billion ($2.9 billion) provision to compensate clients for mis-sold products. Low-cost carrier Ryanair Holdings posted its first third-quarter loss in three years.

"The outbreak of nervousness in risk assets has been attributed mainly to a combination of [U.S. Federal Reserve] tapering, Chinese growth concerns and emerging market currency volatility; we suspect the lukewarm corporate earnings news is as big an issue for equity investors," said Ian Williams, economist and strategist at brokerage Peel Hunt.

A lower-than-expected January reading for U.S. manufacturing activity, attributed to adverse weather, was a further drag on European shares. The Dow Jones Industrial Average was down more than 1% in afternoon trading in New York, while Treasury bond prices rose.

Data showing a faster-than-expected expansion in euro-zone manufacturing in January did little to lighten the mood in stock markets, although it pushed the euro higher against the dollar. The euro continued to gain ground during the day. The disappointing U.S. manufacturing-activity report weighed on the dollar.

WSJ: Europe's Factory Revival Broadens

      According to a report from the Wall Street Journal,"Europe's factories had a busy start to 2014, with some of the strongest improvements seen in countries inside and around the euro zone that have been hobbled by its fiscal and banking crises".

By contrast, manufacturing activity fell further in Russia and slowed in Turkey—developments that will add to the challenges faced by policy makers as foreign investors withdraw their funds, weakening the ruble and the lira.

Surveys of purchasing managers pointed to a pickup in manufacturing activity in the euro zone, especially Greece and Spain. There was an even more marked acceleration in central European and Nordic nations that have close trading and financial links with the currency area.

The surveys were conducted by data firm Markit and published Monday.

"I am more optimistic about Europe than I think I was a couple of months ago," said Leif Johansson, chairman of Swedish telecoms network-equipment maker Ericcson and the U.K.-based pharmaceutical company AstraZeneca PLC.

"We have actually done quite a lot of structural reform in Europe," he said, listing Spain, Portugal, Italy, France and Greece. He said there was a "good chance" of higher growth than normal, even if it takes "a year or two."

Markit said its purchasing managers index for the euro zone's manufacturing sector—based on a survey of 3,000 companies—rose to 54 from 52.7 in December, signaling the fastest expansion since May 2011.

The reading was slightly above the preliminary estimate of 53.9 released last month. A reading above 50 indicates an expansion in activity.

The euro zone's rebound was led by Germany, where PMI rose to a 32-month high of 56.5 from 54.3. It was also aided by an acceleration in Spain, while Italy's manufacturing sector slowed slightly and the contraction in France eased.

"Perhaps the most important development in the report is the further revival of manufacturing in the region's periphery," said Chris Williamson, chief economist at Markit. "The Greek PMI's rise above 50 for the first time since August 2009 is an important signal of how even the most troubled member states are returning to growth."

Europe's broad revival contrasts with the slowdown recorded in some developing economies, and reflects a rebalancing in the drivers of world growth.

According to a survey of purchasing managers released Thursday, China's manufacturing sector contracted in January, while the PMI for Russia released Monday showed activity there was the weakest since June 2009.

Turkey's manufacturers continued to increase output in January, but at the slowest pace since August 2013.

"January's manufacturing PMI data provide further evidence that the economies of central Europe are enjoying a decent recovery, but that manufacturing in emerging Europe's two largest economies, Russia and Turkey, is struggling," said William Jackson, an economist at Capital Economics.

In the U.K., the PMI fell to 56.7 from 57.2, but continued to record a strong rate of growth in one of Europe's better-performing economies.

Mr. Johansson, who is also chairman of the European Round Table of Industrialists, a policy forum for CEOs and chairmen of major European companies, was also upbeat about the growth trajectory of the U.S. economy.

"In the U.S. I think we actually see a fairly stable recovery. Somewhat scattered and fragmented, but still broadly so," he said.

US Stocks deep on the red

Pressure on Stocks Persists  The sell-off in the U.S. equity markets that has ensued in 2014 is persisting in late-morning action, with another lackluster economic report out of China being accompanied by a much softer-than-expected domestic ISM Manufacturing Index. Meanwhile, January U.S. auto sales came in mostly below analysts' expectations. Treasuries have turned higher following the data, which is overshadowing an upbeat eurozone manufacturing report, as well as an unexpected rise in U.S. construction spending. In equity news, Dow member Pfizer reported favorable results from study of its breast cancer treatment and Sysco missed analysts' revenue estimates, while Herbalife issued mixed guidance and announced a $1.0 billion convertible note offer. In other economic news, a separate report showed domestic manufacturing activity continued to expand. The U.S. dollar and crude oil prices are lower, while gold is higher. Overseas, Asian stocks moved mostly lower following the Chinese manufacturing report, while markets in China and Hong Kong remained closed for holidays. Finally, European equities have moved to the downside following the disappointing U.S. and Chinese data. Source: Schwab

WSJ: Safe-Haven trade is making a comeback

     According to a report from the Wall Street Journal,"the safe-haven trade is making a comeback".

"Gold and Treasurys were among last month’s big winners while U.S. stocks fell sharply. Turmoil in emerging markets and concerns about the pace of global economic growth prompted many portfolio managers to shift away from the kinds of investments that did exceptionally well last year but are vulnerable to large swings".

The questions now are just how much longer safe havens will keep rallying and how much further stocks will keep declining.

Market watchers have been saying for months that stocks have been long overdue for a significant decline. But every pullback over the past few years has been short and shallow, as bargain hunters have consistently stepped in and bought the dips.

The S&P 500 has gone 835 calendar days without a 10% correction, according to Bespoke Investment Group, a stretch that dates back to October 2011. The index has rallied 68% through that time frame. Since 1928, there have only been four rallies that ran higher and longer than the current run-up.

        The Dow Jones Industrial Average dropped 5.3% in January, while other markets performed significantly better. Gold gained 3.2% after last year’s steep tumble. Bond prices rallied, as the yield on the benchmark 10-year Treasury note dropped to 2.669% late Friday, from 3% at the end of 2013. Yields and bond prices move inversely from one another. Even volatility rose. The CBOE’s volatility index, the VIX, jumped 34% last month to 18.41, although it still remains below its long-term average of about 20".

At the end of last year, a growing number of market participants fretted that valuations were getting excessive and that the stock market was getting close to bubble territory.

January’s drop quieted much of that chatter.

“A correction of some kind is eventually inevitable, but timing when that 10% drop comes is very difficult,” Bespoke said.

European Banks are starting to look for oportunities or possible adquisitions

China, France drag on global manufacturing revival

Manufacturers around the world enjoyed a solid start to the year as order books swelled, surveys showed on Monday, though a struggle for growth in China and a downturn in France took the shine off the overall picture.

Euro zone factories had their best month since mid-2011 and, with unemployment near record highs, increased headcount for the first time in two years. They were led by a sharp pick-up in Germany and a revival among the states on the region's periphery.

But France, the bloc's second biggest economy, remained a drag on the region.

"The major area of uncertainty over the last few years has been the euro area, but the latest PMI numbers tend to confirm (it)... is on a gentle recovery path with the periphery gaining encouraging momentum as well," said Philip Shaw at Investec.

"The latest numbers on China, and the UK, are a little less positive but there is nothing that would signal any major concerns about those economies from today's surveys."

Growth in China's service sector growth slowed to a five-year low, putting the focus on concerns of an slowdown in Asia's economic powerhouse - a factor behind the selloff that has hit emerging markets in the past two weeks.

A reading above 50 indicates growth.

The sub-index measuring output, which feeds into a composite PMI due on Wednesday and seen as a good guide to broader economic growth, rose to 56.7 from December's 54.9, in line with a flash estimate and its highest since April 2011.

Germany's PMI jumped to a 32-month high but while France's rose to a 23-month peak, it held firmly below the breakeven 50-mark.

Factories increased headcount to meet demand, providing some cheer to policymakers after data on Friday showed unemployment across the bloc held near a record high of 12 percent for the third month running in December.

However, manufacturers were unable to raise prices last month as fast as they did in December, possibly stoking fears of deflation in the region after consumer price inflation dropped unexpectedly in January.

China's Markit/HSBC manufacturing PMI fell to a six-month low of 49.5 in January, suggesting the overall factory sector contracted from December. A similar government measure also fell to a six-month low, although it indicated the sector was still expanding modestly.

A government PMI on the services sector fell to 53.4 in January, firmly in expansion territory but still the index's lowest level since December 2008.

That run of data provided further reminders for markets of the pressures on the world's top emerging market economy as Beijing tries to push major reforms without tamping down growth too much.

China's government wants to reduce a heavy reliance on the investments and exports that have fuelled breakneck economic growth in the past three decades in favor of consumption and services, which it thinks will provide lower but more sustainable growth.

Barclays analysts, referring to manufacturing, said they estimated the seasonal impact of Lunar New Year holidays was minimal on China's factory sector.

"In our view, much of the decline reflects (a) downbeat demand outlook and suggests continued softening in growth momentum," Jian Chang and Jerry Peng said in a note.

US ISM index for January disappoints, sank to 51.3% from 56.5 in December

U.S. manufacturers expanded in January at the slowest rate in eight months as the pace of new orders sharply decelerated, according to the closely followed ISM index. The Institute for Supply Management index sank to 51.3% from 56.5% in December. That's the lowest level since last May. Economists surveyed by MarketWatch had expected the index to drop to 56.0%. Still, any reading over 50 indicate more manufacturers are expanding instead of contracting. The ISM's new-orders gauge plunged 13.2 points to 51.2%, which was also the lowest level since May. And the employment gauge - a signal of hiring intentions - fell 3.5 points to 52.3%

Source: Marketwatch

Reuters Breakingviews: Markets give central bankers lessons in humility by Edward Haas

Markets are teaching central bankers some hard lessons. The monetary authorities in developed economies are learning how hard it is to switch direction. And emerging markets are showing that no policy rate is right when the economy is wrong.

The monetary authorities are not directly responsible for all the current market ructions – from a 6 percent decline in the Japanese stock market in a week to a 6 percent fall of the Turkish lira against the dollar in a month. But the U.S. Federal Reserve’s slow retreat from quantitative easing is the immediate trigger for much of the turmoil.

Central bankers should feel some doubts about their five years of near-zero policy interest rates and masses of QE. It has yielded nothing better than a slow recovery from a deep recession, with overly excited asset markets and still-weak job markets.

Now investors are teaching emerging market central bankers an even harsher lesson. While disinflation remains the dominant global trend, policy rates have been rising in countries where foreign capital might be on the way out or where poor local policies have created outposts of unacceptably high inflation. Turkey and South Africa have followed Brazil and India down the road of anti-stimulus.

Markets have not yet been impressed by the central bank response. The Brazilian real has fallen by 11 percent against the dollar since April, as Brazil’s central bank has gradually increased the policy rate by a total of 3 percentage points. A single rate increase of that magnitude in Turkey this week only stabilised the currency for a day.

Investors may eventually punish only the countries with the most serious difficulties. But it looks increasingly like the waning of QE will cause global trouble. Central bankers should feel chastened.

Source: Reuters

Emerging vacuum a harbinger of global downdraught

Emerging economy policymakers are wailing, understandably. But they can’t expect some magical coordination of global monetary policy. U.S. tightening is essential to curb global bubbles. Emerging markets are the first victims. They won’t be the last.

The complaints are loud. “International monetary cooperation has broken down,” says Raghuram Rajan, the head of India’s central bank. Alexandre Tombini, his Brazilian counterpart, speaks of rising developed market interest rates as a “vacuum cleaner” which sucks emerging economies into turmoil.

It is a total reversal from 2010, when Brazil warned about “currency wars,” a colourful phrase for the effects of ultra-loose American monetary policy. Then devaluing dollars flowed out into emerging markets, pushing up their currencies. Now the money is coming home. Brazil, India and Turkey are among the major emerging economies to have to increase their interest rates, to slow down the outflow, the currency falls and the inflation, slowing growth in the process.

But the laments are not useful. The larger bubbles get, the more dangerous they become. The tightening of monetary policy by the U.S. Federal Reserve is already belated. Its money-printing has pushed many asset prices up to unhealthy levels – and bond and commodity prices are among those already coming back down. “There are so many countries that are looking bubbly,” said Robert Shiller, the Nobel prize-winning economist, of global property prices.

Moreover, many emerging economies – including Brazil, India and Turkey – have exacerbated their weakness through bad policies or inadequate reforms. The receding capital tide has exposed their problems. Progress won’t come easily, though currency weakness and stronger developed country growth will assist exports. But emerging economies’ rebirth will take years, not months.

The emerging turmoil is not great enough to hurt global growth much — provided China keeps growing. But the problems nonetheless hold a warning for developed markets. Even though U.S. and European growth is improving, stocks that raced ahead on loose money in 2013 have faced a difficult January. It is hard to see how global equities can avoid losing further ground this year. Emerging markets won’t be the only ones lamenting a 2014 in which Fed money-printing ends.

Source: Reuters

Japan stock markets extend their declines

Japan's Nikkei share average fell to a fresh 2-1/2 month low on Monday, extending its declines into a third day with little sign that emerging market woes have abated, and upcoming U.S. jobs data keeping investors risk-averse. The Nikkei slid 2 percent to 14,619.13, its lowest closing level since Nov. 13. The benchmark dropped below its 26-week moving average of 14,833.06. The Topix shed 2 percent to 1,196.32, with all of its 33 subsectors in negative territory.

Source:  Reuters

ECB set to reveal further detail of bank health checks

 The European Central Bank will reveal more detail on Monday on how it plans to go about checking that top euro zonebanks have the risks on their balance sheets under control.

The ECB's asset quality review, or AQR, is part of a broader examination that also includes a stress test to see how banks hold up under shock scenarios, to avoid nasty surprises once the ECB takes up responsibility for supervising them from November.

It aims to encourage banks to recognise losses on loans or investments that have soured over time, allowing them to regain investors' trust and free up capacity to grant new loans to help along the euro zone's fragile economic recovery.

"The devil will be in the detail and the risks of lowest common denominator and compromise in such a multilateral process are legion," said Morgan Stanley's Huw van Steenis.

"This is why the market still has many doubts on how cathartic a process the AQR and stress tests will be."

The ECB will address at least some of such doubts on Monday by laying out, for example, how it will define when a loan has turned bad and what the next steps will be.

On Friday, the European Banking Authority (EBA) set out key parameters for the stress tests it coordinates, which imply that the probe will be tougher than previous ones.

The two reviews will eventually feed into each other and their timings will overlap somewhat, but the overall result -spelling out the size of any capital shortfall - will only be published in October.

Analysts have estimated the tests will show the banks need up to 100 billion euros of fresh capital.

Leftist Costa Rica outsider leads election, run-off expected

A left-leaning former diplomat edged ahead in Costa Rica's presidential election on Sunday, riding a wave of disgust at government corruption to get within reach of wresting power from the centrist government in an April run-off.

Luis Guillermo Solis, an academic who has never been elected to office, had a slim lead over ruling party candidate Johnny Araya despite trailing in pre-election polls and early vote returns.

Araya was seen as the front-runner ahead of the vote, but his campaign was hurt by corruption scandals that plagued President Laura Chinchilla's administration.

Solis, who ran on an anti-corruption ticket, won 30.9 percent support on Sunday compared to 29.6 percent for Araya with returns in from around 82 percent of polling centers.

Left-wing lawmaker Jose Maria Villalta was in third place with 17.2 percent. His supporters could help carry Solis to victory in the run-off against Araya, although votes from a host of smaller parties who commanded around a quarter of the tally on Sunday will also be fought over.

A Solis victory in the run-off would mark another triumph for center-left parties which have gained ground in much of Latin America in recent years.

Araya, 56, promised to reduce poverty and painted his leftist rivals as radicals who are a threat to Central America's second-largest economy.

"We represent the safe road, the responsible road, to maintain political, economic and social stability in Costa Rica," Araya told flag-waving supporters of his National Liberation Party after vote returns showed him losing his early lead.

Voter anger over government corruption buoyed his left-leaning rivals, who also promised to tackle inequality in the coffee-producing nation.

Gaffes during the campaign, such as underestimating the price of milk in an interview, distanced Araya from some voters. A prosecutor's probe into allegations of abuse of authority and embezzlement while Araya was mayor of San Jose also dampened his appeal.

Solis, who cut his teeth working in Costa Rica's foreign ministry, surged late in the campaign by pledging to improve infrastructure, overhaul the country's universal health care provider and stamp out corruption.

The eventual winner will have to tackle growing government debt that totals more than half of gross domestic product.

Source: Reuters

Euro dogged by ECB talk, EM sell-off grinds on

Growing pressure for more policy easing in the euro zone pinned the euro near a 10-week low on Monday while persistent tension in emerging markets drove Hungary's forint to a 10-month trough and weighed on global stocks.

Stock markets in Europe reflected the weak appetite for riskier assets as they slid 0.6 percent, following shares in Asia.

MSCI's global index posted its largest monthly decline in January since May 2012. Emerging markets lost 6.6 percent for their worst January since 2009.

"It is a global macro question and global risk sentiment is really at stake here," said John Hardy, head of FX strategy at Saxo bank in Copenhagen. "There are a lot of event risks this week and it just feels like markets are trying to figure out where they are."

The week ahead provides a raft of global business surveys and jobs data from the United States to offer a clearer view on the global economy, while the European Central Bank (ECB) might well consider easing policy at its meeting on Thursday.

The prospect of an ECB move weighed on the euro on Monday, pinning it near 10-week lows at $1.3490 following a break of major support at $1.3506.

A fall in euro zone inflation to 0.7 percent last month - far below the ECB's target of just under 2 percent - has raised the spectre of deflation in the bloc, and with tumbling emerging market currencies threatening to compound the problem, calls are increasing on the bank to take action.

The pressure on the shared currency was eased slightly by data showing euro zone factories enjoyed their strongest month since mid-2011 in January and the first growth in Greek manufacturing activity since August 2009.

Source:  Reuters