Gold slips on stronger equities, but holds above $1,300 10.58pm EST

June 23 (Reuters) - Gold eased further from a two-month high on Monday on stronger equities and sluggish physical appetite, even as safe-haven demand from escalating violence in Iraq kept the metal above $1,300 an ounce.

Spot gold had eased 0.2 percent to $1,311.70 an ounce by 0158 GMT. The metal, which posted its best week in three months on Friday, rose to a two-month high of $1,321.90 in the previous session, although it closed down 0.5 percent.

With the higher prices, physical demand from top consumers China and India has been slow to pick up, adding to the gloom brought on by stronger equities. Asian stocks rose on Monday after Wall Street advanced to new highs and fanned risk appetite.

"The bias remains for weaker gold prices, with little physical interest from China and investor holdings equally lacking direction," ANZ analysts said in a note.

Gold is considered an investment-hedge, and is often bought during times of geopolitical and financial uncertainty.

"There is underlying support from the geopolitical tensions in the Middle East, but with Wall Street near record highs, risk appetite looks strong and that is hurting gold," said a precious metals trader in Hong Kong.

"Without strong demand either from the physical markets or from exchange-traded funds, the gold rally is not going to last."

Traders said physical demand across Asia has been subdued as many expect gold prices to fall further.

Demand is also being hurt by large purchases last year, when gold prices fell 28 percent, and earlier this year.

Meanwhile, bullion is being supported by geopolitical tensions. Iran's supreme leader accused the United States on Sunday of trying to retake control of Iraq by exploiting sectarian rivalries, as Sunni insurgents drove towards Baghdad from new strongholds along the Syrian border.

The metal was also supported by fighting in Ukraine.

Shanghai copper hits 4-mth high; China recovery fuels gains

June 23 (Reuters) - Shanghai copper rallied to its highest in four months on Monday, buttressed by tight supply and solid improvement in China's private sector, while London copper hit a three-week peak.

Activity in China's factory sector expanded in June for the first time in six months as new orders surged, a preliminary HSBC survey showed on Monday. 
"The stimulus measures of the past three months are really working and having a positive impact on the overall economy," said Helen Lau, senior mining analyst at UOB-Kay Hian Securities in Hong Kong.

Inflation concerns, driven by higher oil prices, were also supporting prices, Lau said. But further gains faced headwinds, given seasonally slower demand from copper cable and rod manufacturers in the next few months, she added.

Three-month copper on the London Metal Exchange had climbed 0.7 percent to $6,870 a tonne by 0135 GMT, after hitting $6,872 a tonne, its highest since June 3.

The most-traded August copper contract on the Shanghai Futures Exchange rallied 2.2 percent to 49,490 yuan

($8,000) a tonne. It earlier climbed 2.3 pct to 49,580 yuan a tonne, the strongest since Feb. 26.

The HSBC/Markit Flash China Manufacturing Purchasing Managers' Index rose to 50.8 in June from May's final reading of 49.4, beating a Reuters poll forecast of 49.7 and creeping above the 50-point level that separates growth in activity from contraction.

Meanwhile, UOB-Kay Hian's Lau said an investigation into suspected fraud at a Chinese port has caused banks to take longer to approve loans for copper imports.

"Certainly China will reduce imports because of this financing issue and it will also take a longer time to get cleared, so this will create some short term shortage in the spot market," she said.

Shaken by a fraud investigation into metal financing in the world's seventh-busiest port, banks and trading houses have been made painfully aware of the risks they face storing commodities in China's sprawling warehouse sector.

Suggesting further gains in the near term, ShFE and LME copper punched through their 200-day moving averages, a key buy signal for chart-following strategies.

Hedge funds and money managers cut their bullish bets to switch the copper market to a net short position in the week to June 17, according to data from the Commodity Futures Trading Commission on Friday.

Across other metals, buying interest for zinc may be waning on the approach to the $2,200, said broker Triland in a note, after LME zinc scaled a 16-month peak on Friday.

"The market is not overbought on the RSI (relative strength index) measurement however, so further gains are still likely in the short term. We're not convinced the current physical market is strong enough to justify spread tightness, but overall the picture looks generally positive," it said.

Reuters: COLUMN-Can we really do without coal? by John Kemp

June 23 (Reuters) - Two-thirds of the world’s already discovered reserves of oil, coal and natural gas must remain unburned if the rise in average global temperatures is to be limited to 2 degrees Celsius by 2050, according to the International Energy Agency.

But coal miners and oil and gas companies round the world allocated $674 billion to finding even more reserves and new ways of extracting them in 2012/13. Much of this investment risks being wasted, according to the Carbon Tracker Initiative, which is campaigning to get investors to think again.

(“Unburnable carbon 2013: wasted assets and stranded capital”)

“It is possible that much of this additional spending would prove fruitless. At worst, these assets might be ‘stranded’ forever,” Martin Wolf, the celebrated chief economics commentator of the Financial Times, wrote in a sympathetic review recently. (“A climate fix would ruin investors” June 17)

Carbon Tracker Initiative is part of a broader divestment movement pressing universities, pension funds and other socially responsible investors to boycott shares and loans in fossil fuel companies to force them to leave the oil, gas and coal “down there”. (“Stranded assets and the fossil fuel divestment campaign: what does divestment mean for the valuation of fossil fuel assets?” Oct 2013)

The divestment campaign has drawn a swift response. Major oil and gas companies such as Exxon and Shell reject the claim that their exploration and development spending is being wasted.

“We do not believe that any of our proven reserves will become stranded,” Shell wrote in a letter to investors on May 16.

“While the stranded asset notion may appear to be a strong and thought-through case, it does have some fundamental flaws, and there is a risk that some interest groups use it to trivialise the important societal issue of rising levels of carbon dioxide in the atmosphere,” the company complained in a detailed response.


GAMBLING ON INACTION

There is an obvious inconsistency between companies continuing to invest in developing more fossil fuels while governments maintain they are still committed to the 2 degree target.

According to Wolf: “Something will have to give: either the world will abandon its pledge to keep emissions below the level thought to produce a temperature rise of 2C, or the fossil fuel companies are holding stranded assets and investing in unusable ones. Investors are implicitly betting on the former possibility.”

He concluded: “Major energy producers do not believe governments will do what they promise. They envisage a very different and quite unrevolutionary energy future in which the reserves they now possess and those they plan to develop will all be burnt.”

Wolf is right about the contradiction between investment policies and climate targets. It is more likely the world will miss the 2 degree target than that fossil fuel reserves will be stranded.


PUTTING COAL BEYOND USE

Rather than oil or gas, the primary target of the divestment campaign is coal, which emits far more carbon dioxide when burned for electricity production.

“Coal companies appear far more vulnerable than oil and gas,” according to researchers at Oxford University’s Stranded Assets Programme. “Coal not only contributes to climate change but also releases harmful pollutants with short-term and visible, health and environmental consequences.”

In the first phase of the divestment process, concerned investors are likely to begin by liquidating their holdings in coal companies, the Oxford researchers explain, before moving on later to oil and gas producers.

Several prominent U.S. universities and European pension funds have already sold their shares in coal companies.

If the total amount of carbon that can be burned in the next few decades is constrained by an overall “carbon budget”, and coal is the most polluting fossil fuel, it might seem to make sense to put coal reserves off limits first.

Some of the big oil and gas companies have quietly supported this idea, hoping to replace dirty coal with clean-burning gas and bump up demand for their own products in the process.

The unspoken alliance of climate campaigners and gas companies appears to have convinced the Obama administration.

Cutting coal consumption and replacing it with gas is the central objective of new U.S. regulations on power plants at home. (“Regulatory impact analysis for the proposed carbon pollution guidelines for existing power plants” June 2014)

And the U.S. Treasury has stated it will not provide financial support for any new coal-fired plants in poor countries. (“Guidance for U.S. positions on multilateral development banks engaging with developing countries on coal-fired power generation” Oct 2013)


COAL REMAINS INDISPENSABLE

The stigmatisation campaign against coal, in the words of the Oxford researchers, is already well underway and has notched up some notable early successes.

Recent successes in developing shale gas and oil have led some campaigners to imply the world could do without coal.

But the effort to put coal off limits is doomed to fail. Coal resources will remain an essential part of the energy mix far into the future.

Coal accounts for roughly a third of known fossil fuel resources (excluding highly unconventional resources such as methane hydrates which are unlikely to be developed in any foreseeable timeframe).

Gas and oil appear much more abundant than before thanks to the shale revolution. But they would start to look scarce again if coal was put off limits and the entire power generation sector switched to gas.

On a global scale, switching entirely from coal to gas would put a tremendous strain on gas supplies and push prices sharply higher. It would be a windfall for gas companies but not for everyone else.

Coal also has important benefits for energy security. Coal reserves are much more widely distributed around the world than the other fossil fuels. Major developing economies with fast-growing energy demand, including China and India, have abundant coal resources but relatively little oil and gas.

Shale oil and gas could change that calculation, since they are more widely distributed than conventional oil and gas, but their widespread development still lies in the future.

In the meantime, coal is cheaper than oil and gas, available from a broader range of suppliers, and the major emerging economies have more of it at home. Coal is therefore vital to energy security in developing economies.

For these reasons, coal has been the fastest-growing source of energy in the 21st century, driven by growth in emerging markets. Coal is the second-largest source of primary energy after oil and the largest source of electricity.

“Coal has been, is and will be the backbone of modern electricity and the bedrock on which the modern world is built,” according to the World Coal Association. (“The public image of coal: inconvenient facts and political correctness” May 2014)

The trade association has an obvious interest in promoting the future of coal, but that does not make its claims any less true.

There is no conceivable energy future over the next 30 to 40 years in which coal does not play an enormous role.

The divestment campaign, however well intentioned, will therefore fail. While it might shut down some of the ageing U.S. coal mines in Appalachia and Kentucky, it will not dent the developing world’s prodigious demand for coal-fired power.


CLEANER AND MORE EFFICIENT

If coal is set to remain a big part of the energy mix, however, the way it is burned will have to change. Coal power plants in China and other developing economies are creating killer smogs, which are poisoning the population as well as spewing billions of tonnes of greenhouse-causing carbon dioxide into the atmosphere.

In future, coal must be made to burn more cleanly (to cut air pollution) and more efficiently (to reduce the amount of greenhouse gas emitted for every kilowatt-hour of electricity generated).

In both cases, the challenge is to bring the whole fleet of coal-fired power stations up to the standards of the best.

Even in the United States, more than half of coal-fired power plants are over 40 years old. China and India, too, have lots of very old facilities. Most of these old plants are too small to reach maximum efficiency and employ outdated technology. (“Focus on clean coal” Nov 2006)

The average power plant in the United States or China achieves a thermal efficiency of just 33 percent. For every three units of energy contained in the fuel burned in the plant only one unit of usable electrical energy is delivered to the grid. In India, the percentage is even lower.

But modern plants built on a scale of 500 or even 1,000 megawatts, with ultra-supercritical boilers, can achieve thermal efficiencies of 40 percent or more, burning less coal to produce the same amount of power.

Even higher efficiencies are possible if instead of burning the coal directly it is gasified and the gas is then used in a combined cycle system (first driving a gas turbine and then a steam turbine). Integrated gasification and combined cycle plants are tricky to build and operate but could achieve thermal efficiencies of 45 percent.

China, India and even the United States are now building power plants that are larger, far more efficient and with better pollution-control technology. Modern coal-fired power plants can make a contribution towards slowing climate change, in combination with more use of natural gas, renewables such as wind and solar, nuclear power, and energy efficiency measures on the demand side.

The question is how to shut down the fleet of old power plants that fall far below these standards. “To reduce emissions, replacement of the oldest plant should be a high priority, but it is rarely economic, and electricity demand growth dictates that these plants often remain open,” the International Energy Agency explained in 2006.

In the United States, the Obama administration is now attempting to force these old power plants to shut or undertake expensive upgrades by introducing strict rules on pollution and carbon emissions.

China, India and other developing countries will eventually have to overhaul their own older coal-fired plants if they are to enjoy clean air and contribute to global efforts to limit climate change.

The realities of the energy system mean there has to be a future for coal.

Even in the United States, with its shale gas boom, coal is still expected to account for 30 percent of power generation by 2025, down from 37 percent currently. In Asia, coal's share is currently much higher and cannot conceivably be replaced by gas.

To limit the impact, however, coal will have to be burned in power plants very different from most of those in existence today.

Rather than trying to shut down the coal industry, campaigners would be more effective if they focused on trying to modernise the electricity sector to use newer, larger, cleaner and more efficient power plants.

Japan spot LNG contracted in May falls to $14.80/mmBtu

 June 23 (Reuters) - Prices for spot liquefied natural gas (LNG) contracted in May for delivery to Japan averaged $14.80 per million British thermal units (mmBtu) on a delivered ex-ship basis, down from $16.00 a month earlier, the trade ministry said.

Spot LNG prices for new front-month August delivery fell to around $12.05 per mmBtu as a summer glut of LNG supplies has spurred one of the sharpest downturns on record, prompting spot prices to drop some 40 percent from a late-winter February peak above $20 per mmBtu.
Japan in April started releasing spot LNG prices for the first time to add transparency to an opaque market and amid concern about rising fuel costs in the wake of the shutdown of nuclear plants after the Fukushima crisis.

Japan has been importing record volumes of LNG to run power stations following the meltdowns at the Fukushima Daiichi plant north of Tokyo after the March 2011 earthquake and the ensuing shutdown of all 48 reactors in the country.

Japan takes about a third of world LNG shipments, importing a record 87.73 million tonnes in the year to the end of March. The average spot price is based on about 10 percent of the super-chilled fuel bought by Japan.

Japan's LNG price survey looks at samples of fixed prices for LNG sold to power companies and utilities among others, and excludes spot deals linked to benchmark prices such as the U.S. natural gas Henry Hub index.

China June HSBC flash PMI shows first expansion in 6 months as orders surge

June 23 (Reuters) - Activity in China's factory sector expanded in June for the first time in six months as new orders surged, a preliminary HSBC survey showed on Monday, offering new signs the economy is stabilising thanks to Beijing's measures to shore up growth.

The HSBC/Markit Flash China Manufacturing Purchasing Managers' Index rose to 50.8 in June from May's final reading of 49.4, beating a Reuters poll forecast of 49.7 and creeping above the 50-point level that separates growth in activity from contraction.

It was the first time since December that the PMI was in growth territory, and the highest reading since November, when it was also 50.8.

"This month's improvement is consistent with data suggesting that the authorities' mini-stimulus are filtering through to the real economy," said Qu Hongbin, chief economist for China at HSBC, referring to a series of measures announced by the government in recent months to spur activity.

"We expect policymakers to continue their current path of accommodative policy stance until the recovery is sustained,” he added.

Asian stock markets and the Australian dollar firmed on the news.

The sub-index for new orders, a proxy to measure domestic and foreign demand, rose to 51.8, the fastest pace in 15 months.

The survey showed an across-the-board improvement in the vast factory sector, with most of the 11 sub-indices, ranging from output to new orders and stocks of purchases, accelerating from previous months.

The flash PMI data is the earliest indicator in a month to help gauge the economic momentum and thus is closely watched by investors.

Beijing has unveiled a series of modest policy measures in recent months to give a lift to economic growth, which dipped to a 18-month low in the first quarter.

Such measures include targeted reserve requirement cuts for some banks, quicker fiscal disbursements and hastening construction of railways and public housing projects.

But the recovery has been patchy.

Despite a general pick-up in the manufacturing sector, new export orders grew at a markedly slower pace in June, as recoveries in the United States and the European Union do not appear to be giving their usual robust boost to export-reliant Asian economies.

Moreover, the survey's sub-index for employment pointed to jobs still being shed, though the pace of contraction eased from May.

China has set an annual target for the economy to grow about 7.5 percent in 2014 and a Reuters poll found that economists expected growth of 7.3 percent for this year.

Chinese leaders have ruled out the possibility of any big stimulus to pump prim the economy as they tolerate a slower growth rate while pushing ahead with structural reforms.

Premier Li Keqiang said last week that China's economy would not suffer a hard landing and would continue to grow at a medium to high pace in the long term without strong stimulus. [ID:nL6N0P00SA]

The final Markit/HSBC manufacturing PMI for June is due on July 1.

Accusations of election fraud gather pace in Afghanistan

Reuters) - The party of Afghan presidential candidate Abdullah Abdullah broadcast audio on Sunday that it said showed mass fraud had been committed in an election that aims to transfer power democratically in the country for the first time.

The audio purports to show that Independent Election Commission (IEC) Secretariat head Zia-ul-Haq Amarkhil made phone calls to officials in several provinces ordering them to stuff ballot boxes using code words.

While Amarkhil denies the allegations and the Independent Election Complaints Commission is investigating, the broadcast could stoke further protests across the country supporting Abdullah's decision to withdraw from the vote.

The election comes at a delicate time as most foreign troops will exit by the end of the year, leaving behind a still strong Taliban insurgency and deepening economic crisis.

Abdullah, former leader of the anti-Taliban Northern Alliance, last week recalled his observers monitoring the ongoing count and said the outcome of the run-off with former finance minister Ashraf Ghani on June 14 would be illegal.

The United Nations has warned of an escalation of ethnic tension and called on him to reengage with the election.

Abdullah is of mixed heritage but his support base is with the Tajik community, while ex-World Bank economist Ghani is an ethnic Pashtun.

Ignoring U.N. and government calls to return to the process, Abdullah's party on Sunday used a news conference to air what it said were the intercepted phone call recordings of Amarkhil.

"Today we are releasing documents which show Amarkhil has organised cheating and manipulated votes favouring one candidate. In the coming days we will release more documents to the public," Baryalai Arsalai, Abdullah's campaign manager, said.

In one example, the voice instructs the person on the other end of the line to "stuff the sheep properly". The word "sheep" is interpreted by Abdullah's staff as code for "ballot box".

POWER STRUGGLE?

The authenticity of the audio was denied by Amarkhil, who told the Wall Street Journal on Sunday that he did not recall the conversations and "would never talk like that". Reuters was not able to reach him for comment.

The audio also includes alleged conversations in which the voice supposedly belonging to Amarkhil asks his staff to hire election workers based on their ethnicity, asking for more Uzbeks and Pashtuns, who mostly support Ghani.

The IEC deferred comment to the Independent Election Complaints Commission, which said it was looking into the allegations.

Tahir Zahir, a spokesman for Ghani, said: "It is very easy to duplicate someone’s voice but a body with authority and the election complaints commission should investigate its authenticity."

There has been no official comment from the outgoing president, Hamid Karzai, who has not publicly supported either candidate. He was unable to stand for election again.

The broadcasts coupled with an apparent escalation in protests, so far only numbering in the hundreds or low thousands, have intensified longstanding concerns of a struggle for power along ethnic lines. Several hundred of Abdullah's supporters protested outside the presidential palace, while others gathered and disrupted traffic for a second day on the main road leading to the international airport.

Source: Reuters

Fighting strains Ukraine ceasefire, Putin urges dialogue

Fighting flared between Ukrainian and pro-Moscow separatist forces, both sides reported on Sunday, further straining a unilateral ceasefire declared by Ukraine as Russian President Vladimir Putin pressed Kiev to talk to the rebels.

Putin and Ukrainian President Petro Poroshenko, at separate ceremonies marking the anniversary of Nazi Germany's invasion of the Soviet Union, both stressed the need to bring peace to Ukraine's rebellious east.

The seven-day ceasefire came under pressure almost as soon at it began on Friday night, with the government accusing the separatists of attacking its military bases and posts on the Russian border. The violence continued for a second night into Sunday.

"Unfortunately, what we are seeing ... tells us that the fighting is still going on and last night we saw some active use of artillery from the Ukrainian side," Putin said after laying flowers at the Tomb of the Unknown Soldier in Moscow.

He said it was not clear whether artillery was used by the Ukrainian army or the "so-called paramilitary of the right-wing forces" supporting the government. He appeared to attach no blame to separatist forces.

Poroshenko wants Putin's unqualified backing for a 15-point peace plan he announced on Friday, before meetings with the European Union in the coming week. These will include the signing on June 27 of an association agreement with the bloc which includes a free trade deal.

In his comments published on the Kremlin website, Putin repeated his support for the ceasefire and peace plan in only general terms.

"We need to ensure that all fighting is stopped," he said. "Ultimately the political process is the most important. It is important that this ceasefire lead to dialogue between all opposing sides in order to find compromises acceptable for all."

Poroshenko told U.S. Vice President Joe Biden during a phone call on Sunday that Russian separatists continue to attack Ukrainian forces, including with artillery, despite the ceasefire, the White House said.

"The vice president reiterated that the United States was working closely with its G-7 partners to prepare further economic sanctions against Russia if Moscow did not take actions ... to stop the flow of arms and militants across the border and use its influence to publicly call on the separatists to lay down their arms," the White House added.

Source: Reuters

theguardian: Isis captures more Iraqi towns and border crossings

Jihadist fighters in Iraq seized three border crossings into Syria and Jordan and four nearby towns over the weekend, giving the Islamic State in Iraq and the Levant (Isis) control over much of the country's western frontier and directly threatening the country's main power supply.

Isis can now add large swaths of the Iraqi border to a 300km stretch of land it already controls along the Euphrates river, from Mosul in the north to Saddam Hussein's home town, Tikrit, which now gives the group a launching pad for potential attacks on strategic sites, including the lifeblood of Iraq's electricity generation, the Haditha dam. The gains also bring the crisis in Iraq to the doorstep of Jordan, a key ally of the United States.

The latest Isis offensive comes as Iraq's polarised political blocs face a week of intense lobbying to form an inclusive government that could unite the fracturing country.

The US secretary of state, John Kerry, is due in Baghdad on Monday to meet Iraqi lawmakers who had been bitterly divided before the jihadist surge, but have recently been reaching out to the US and Iran with increasing desperation.

The latest Isis offensive in western Anbar province has seen the group take four towns in recent days. Iraqi officials said the militants took over the Turaibil crossing with Jordan and the Walid crossing with Syria after government forces there pulled out. Al-Qaim, a restive town on the Syrian border, fell a day earlier.

The capture of the crossings follows the fall on Friday and Saturday of the towns of Rawah, Anah and Rutba. They are all in the Sunni-dominated Anbar province, where the militants have since January controlled the city of Falluja and parts of the provincial capital, Ramadi.

Rutba is on the main highway from Baghdad to the two border crossings and its capture has in effect cut the Iraqi capital's main land route to Jordan. It is an artery for passengers and goods, though it has been infrequently used in recent months because of deteriorating security.

Iraq's armed forces are outgunned and ill-prepared to deal with Isis, which has rapidly gathered momentum as it has surged across eastern Syria and back into Iraq, where the earliest incarnation of the group was born a decade ago.

In Baghdad, the enmity between the political factions before the Isis attack meant no consensus about a new government was likely to emerge for some time. Iraqi leaders now increasingly believe that Barack Obama is making US help conditional on their first finding a political solution that empowers disenfranchised groups, especially the country's Sunnis.

Iran, which had eclipsed the US as Iraq's main power broker in recent years, on Sunday warned Washington against sending fighter jets into the region. The country's supreme leader, Ayatollah Ali Khamenei, said Iraq needed no foreign intervention. Iran is heavily invested in the defence of Baghdad, with a prominent Iranian general, Qassem Suleimani, in the capital to coordinate the city's defences.

Obama warned in an interview on Sunday that Isis could spread conflict to neighbouring states and pose a "medium- and long-term threat" to the US. "We're going to have to be vigilant generally," he said. "Right now the problem with Isis is the fact that they're destabilising the country. That could spill over into some of our allies like Jordan.

"But I think it's important for us to recognise that Isis is just one of a number of organisations that we have to stay focused on," he said, highlighting al-Qaida in Yemen and Boko Haram in west Africa among others.

The president denied US inaction in Syria and Iraq had allowed the crisis to escalate. "What we can't do is think that we're just going to play whack-a-mole and send US troops occupying various countries wherever these organisations pop up. We're going to have to have a more focused, more targeted strategy and we're going to have to partner and train local law enforcement and military to do their jobs as well."

Iraq Army's Ability to Fight Raises Worries

          The WSJ reports,"the Iraq army's quick collapse against Sunni insurgents in Mosul this month surprised the U.S. military, which spent about $25 billion to train and supply the army over nearly a decade of occupation until 2011.

But it didn't surprise Mosul's residents, who say they witnessed the Iraqi army's decay through corruption, sectarianism and incompetence.

Before the conquest, the city's mostly Sunni residents said they lived under a Shiite-dominant military regime that behaved like an occupying army—extorting protection money from local businesses and motorists and detaining those who refused, the residents said".

Now, as ISIS seems intent on attacking Baghdad and important Shiite pilgrimage cities south of Iraq's capital, U.S. and Iraqi military leaders say they worry Iraqi forces will once again collapse.

The U.S. discovered significant problems as it stepped up its assessment of Iraq's security forces in recent months, American officials said. They say they noted that more competent Sunni military tacticians in units in the north had been forced out by the Shiite-dominated government.

Across the military U.S. military personnel found the Iraqis were failing to properly maintain equipment. Training standards have declined sharply from 2011, when U.S. military forces advised Iraqi units.

The ISIS insurgents "are not strong, but the military is very weak," said Atheel Al Nujaifi, the governor of Nineveh province who said he fled its capital Mosul in the middle of the night on June 10 before the city fell. "There was no responsible leadership, there was no planning, there was no correct utilization for the military tools."

"The leaders and the soldiers have no military experience and have no convictions," he added.

Instead, the Iraqi command that ran Mosul by direct order of Prime Minister Nouri al-Maliki ruled the city like a fief, Mr. Nujaifi and other residents said.

"They are not an army, they just take money. No more," said a local Sunni militant in Mosul who said he fought alongside ISIS. "They don't care about orders, weapons or vehicles. They are paid just to get money."
Given how Iraqi soldiers departed without staging any defense of Mosul, the city's residents, as well as Iraqi and U.S. officials, speculate that former operations commander Mahdi Al Gharawi and his lieutenants sold the city to the conquering Islamist militants.

"If the Shiite militias and the military come to Mosul, all the people of Mosul will fight them," Mr. Nujaifi said. "The people are afraid of the militias and the army now more than they were afraid of ISIS."

The threat to Baghdad grew on Sunday as ISIS insurgents swept through towns in western Iraq and overran the Turaibil border outpost with Jordan and the al-Walid crossing with Syria, a day after they took the Syrian border crossing of al Qaim, security officials said. They faced little resistance from Iraqi national security soldiers, many of whom left their posts.

The assaults bolstered ISIS's cross-border supply lines with Syria and could serve the group's goal of carving out an Islamic state from the Mediterranean Sea to the Persian Gulf.

Military spokesman Gen. Qassim Atta disputed reports that Iraqi forces had abandoned their positions on the Iraq's western border, saying that the army tactically pulled out of the area to regroup and attack insurgents from the east.

This year, Lt. Gen. Michael Flynn, head of the Defense Intelligence Agency, the main U.S. foreign military espionage agency, noted the Iraqi security forces had been unable to stop rising violence or suppress militant activity in Iraq's Sunni-dominated areas.

"Iraqi military and police forces lack cohesion, are undermanned, and are poorly trained, equipped, and supplied," Gen. Flynn said in February. "This leaves them vulnerable to terrorist attack, infiltration and corruption."

The Pentagon said it has seen apparent improvements in the performance of the Iraqi military in recent days of fighting against Sunni militants, but many officials still said they harbor concerns over whether the forces can defend the capital.

Units stationed near Baghdad, U.S. defense officials said, are better trained and possess more motivation to fight and defend the capital from ISIS's Sunni militants than forces positioned in Sunni-dominated parts of the country.

But some U.S. officials were concerned that the Iraq military's apparent improved recent performance is due to a slowdown in the advance of ISIS forces and that the Sunni militants may be simply be resetting their forces for a larger assault on the capital.

One senior U.S. defense official said ISIS militants were likely to avoid a frontal onslaught on Baghdad or direct engagement with the troops stationed outside the city.

Instead, the official said militants likely would slip in through Sunni neighborhoods, then resume the kind of sectarian attacks that ripped apart Baghdad in 2006. U.S. officials are also worried about the potential of rocket and artillery attacks on Baghdad. ISIS isn't adept enough to precisely fire artillery, but will be able to hit populated areas of Baghdad.

The Iraqi forces lack the air power to quickly counter attack, officials said. Iraq's military has two turboprop airplanes that can fire Hellfire missiles, said an Iraqi general in an interview earlier this year. But according to recent reports, Iraqi forces have since run out of Hellfire missiles so American suppliers are expediting delivery of more.

Iraq has ordered F-16 fighter jets, but their delivery, which is scheduled for September, cannot be rushed.

Yet even if the U.S. is able to deliver a surplus of much-needed weapons to Iraq, it isn't clear if Iraqi soldiers can make up for the deficit in morale that has given ISIS militants the upper hand.

Asian Stocks Advance as Chinese Manufacturing Expands

The MSCI Asia Pacific Index (MXAP) gained 0.5 percent to 145.42 as of 10:13 a.m. in Hong Kong. About five stocks rose for every three that fell. A HSBC Holdings Plc/Markit Ltd. preliminary index of factory activity for China was at 50.8 for June, up from 49.4 in May. Readings above 50 indicate expansion.

“We’ve had a protracted period of sub-50 PMIs in China and I expect we are going to move into the period of plus-50 in the second half of this year, and that will be viewed fairly positively,” Tim Schroeders, a portfolio manager who helps oversee $1 billion in equities at Pengana Capital Ltd. in Melbourne, said by phone. “The platform is very solid for the acceleration of growth into the second half of this year against the backdrop of very accommodative policy globally.”

The Asia-Pacific gauge added 0.4 percent last week, to cap its longest run of weekly gains since August, as Federal Reserve Chair Janet Yellen said she expects U.S. interest rates will stay near zero for a “considerable time” after stimulatory bond buying ends. The measure rose 2.4 percent this year through last week.

Hong Kong’s Hang Seng Index rose 0.5 percent. The Hang Seng China Enterprises Index of mainland shares traded in the city gained 0.5 percent. The Shanghai Composite Index added 0.1 percent.

Japan’s Topix (TPX) index added 0.1 percent and South Korea’s Kospi index rose 0.5 percent. Australia’s S&P/ASX 200 Index gained 0.8 percent today, while New Zealand’s NZX 50 Index lost 0.4 percent. Taiwan’s Taiex index advanced 0.2 percent and Singapore’s Straits Times Index increased 0.1 percent.

Futures on the Standard & Poor’s 500 Index added 0.2 percent today. The measure rose 0.2 percent on June 20 as drugmakers rallied on merger activity and investors speculated economic growth will accelerate.

Source: Bloomberg

The HSBC China flash purchasing managers' index at 50.8 in June(49.4 in May)

Activity in China's manufacturing sector has expanded for the first time in six months in June, according to a preliminary survey.

The HSBC China flash purchasing managers' index printed at 50.8 in June, up from 49.4 in May.

The flash index is published ahead of final PMI data and is usually based on 85 per cent to 90 per cent of total survey responses each month.

Source: The Australian