Canada stocks to hit record highs on energy rebound

Canadian stocks will probably set record highs this year and next, lifted by strength in the energy sector and an improving global outlook, a Reuters poll showed on Thursday.

Buoyed by an increasingly stable global economy and easy monetary policies across the world, stock markets have been steadily advancing. The Canadian equities market, which lagged behind its global peers in 2013, has finally caught up.

The Toronto Stock Exchange's S&P/TSX composite index <.GSPTSE> is expected to build on recent strong momentum to end 2014 with double-digit growth, but the advance from current levels will be somewhat muted.

The median forecast in the poll of 38 market analysts showed the index reaching 15,300 by the end of 2014, up 12 percent from the start of the year and 2 percent from Wednesday's close.

The data also projected the index would hit 15,850 by the middle of 2015.

"The broad theme for the rest of this year is a modest but continued rebound," said Edward Jones strategist Craig Fehr. "I have a fair amount of confidence that the global economy is on the upswing.

"The fact that the TSX has finally started to get some legs this year is a reflection of the rebound in energy and materials," he added.

The Canadian benchmark, up about 10 percent this year, has outperformed most major equity indices so far. It hit a record closing high last week but failed to crack the all-time intraday high of 15,154.77 touched in June 2008.

"The flip side to the good news story is that people are worried we've had such good returns over time that the valuations look stretched," said John Stephenson, president of Stephenson & Co Capital Management.

Given the recent run-up in share prices, some fund managers expect the Toronto market to pull back at some point.

"I wouldn't be surprised to see a correction along the way in the next few months," said Michael Sprung, president of Sprung Investment Management. "It's getting very difficult to find really good value when you look at individual securities."

Other dangers for the market include the prospect of higher interest rates, which would be negative for both Canadian equities and commodity prices, said Matt Skipp, president of SW8 Asset Management. He sees the market slipping to 14,500 by year-end.

But the biggest risk for Canada would be significant weakness in China, he said. China is a major consumer of commodities exported from the resource-sensitive Canadian market.

Others are more optimistic that what is driving Toronto shares is optimism about Canadian companies, not just liquidity from global central banks.

"This rally is earnings-driven," said Elvis Picardo, strategist at Global Securities. "And because it's earnings-driven and because those earnings estimates don't look out of whack, valuations are still quite reasonable for this cycle of the economy."

The TSX is trading at a price-to-earnings multiple of 18.10, compared with 18.76 for the S&P 500 <.SPX>. 
The driving force behind the TSX rally has been the energy sector, which has climbed about 24 percent this year.

The industry has benefited from stronger oil prices, a narrowing of Canadian crude's discount to global benchmarks, solid earnings and an expansion in production.

The flaring of tensions in Ukraine and Iraq in recent months has also provided a boost to both oil prices and energy shares.
Source: Reuters

U.S. takes time to gather data before any attacks on ISIL in Iraq

U.S. intelligence about the Islamist insurgent offensive in Iraq is improving but it could take weeks to complete a detailed picture of the threat and any possible American air attacks do not appear imminent, U.S. officials said on Thursday.

Last week's announcement that up to 300 U.S. military advisers were being sent to Baghdad and the earlier movement of an aircraft carrier, a cruiser and a destroyer into the Gulf prompted speculation of impending military action against Islamic State of Iraq and the Levant (ISIL) militants.

"We’re just not there yet," one official told Reuters, speaking on condition of anonymity.

The U.S. intelligence picture is being filled in with information from flights by about 30 to 35 manned surveillance planes and drones flying over the country daily.

U.S. officials said this would be further boosted by the opening on Wednesday of a joint Iraq-U.S. operations center in Baghdad staffed by about 90 military personnel.

It will take time, the officials said, to build a detailed picture of ISIL's deployments, intentions and weapons stockpile,

which has grown considerably since its black-clad forces overran Iraqi government arsenals in the last few weeks.

Another U.S. official, who declined to be identified, said the patchy nature of current intelligence on ISIL's activities would not necessarily rule out early limited U.S. air strikes should specific targets be identified.

President Barack Obama has been reluctant to engage in the sectarian conflict. The president has said the emphasis at this stage is on pressuring the Shi'ite-dominated leadership in Baghdad to build an inclusive government that brings in Sunni and Kurdish factions to create a united front ISIL's Sunni fighters.


CONGRESSIONAL CAUTION

Members of Congress, who would have to approve action if it became long or expensive, have made clear that they would back action only if they see concrete signs that Iraqi Prime Minister Nuri al-Maliki is moving to form an inclusive government.

Democratic Senator Carl Levin, chairman of the Armed Services Committee, on Thursday set three conditions for his support for direct U.S. involvement, including air strikes.

He said he would back them if U.S. military leaders thought they would change the momentum on the ground, if they were supported by U.S. allies in the region and if leaders of all elements of Iraqi society came together to make a formal request for more direct support.

In a speech in the U.S. Senate, Levin criticized Maliki as failing to take action to draw in other factions and said: "We can’t save Iraqis from themselves. Only if Iraq’s leaders begin to unify their nation can any help from us really matter."

U.S. officials in Washington said as well as U.S. surveillance flights, aircraft from Iran and Syria, both U.S. adversaries but Shi'ite-run states supportive of Maliki, may also be flying over Iraq.

Syrian and Iraqi officials said Syrian aircraft hit the town of Al-Qaim on their mutual border. Malaki said the strike took place within Syrian territory and there was no direct coordination.

The State Department said it had no evidence to counter reports that Syrian planes had struck ISIL targets inside Iraq. A U.S. official said there was evidence that Iranian surveillance drones were operating over eastern Iraqi airspace, perhaps flying from within Iraq.
Source: Reuters

Google unveils new products

More than 6,000 geeks, app developers and Google fans flocked to San Francisco's Moscone Center on Wednesday to attend Google I/O's annual conference and unveiling of new products. Wearable devices, Google Fit for personal health, Google Auto for connected cars and Google TV were the favorites among Chinese developers here to explore and learn.

With a simple click on the Google Fit app, you can manage your daily workout information from number of steps to weight, meal intake and nutrition and a daily summary that can be uploaded for personal use or sharing.

"The service allows Google users to volunteer their health records either manually or by utilizing personal wearable devices to manage fitness, merging potentially separate health records into one centralized Google Fit profile," said Matias Duarte, Google's vice-president of design. "But the key point is: you are in control, it's your decision whether to share it with the public or not."

The previous Google Health service was released to general public in 2008 but closed in January 2012 due to lack of widespread adoption. The other concern was privacy related issues, since it did encourage users to set up personal medical profiles online, and according to its Terms of Service, Google Health is not considered a "covered entity" under the Health Insurance Portability and Accountability Act of 1996 (HIPAA), therefore HIPAA privacy laws do not apply to it.

Mike, a Chinese developer who declined to give his company name, said the most attractive announcement for him today concerned the wearable devices.

"It's fascinating to see what Google has announced on wearable devices, which is definitely trendy for China, and something we could witness and learn," he said. "We are actually working on similar developments on our own platform, which is tailored for the Chinese market and end users."

Bruce, a Chinese software engineer attending the show, said what he saw today about Google Auto was something interesting to look into.

"Google Auto allows us to have a brand new experience in connecting our car, which has not happened in the Chinese market yet, definitely something the industry can utilize for the future. Since Android is the most used mobile operating system today, it gives all Chinese developers a positive signal on creating Android experiences within a strong ecosystem," said the engineer, who also declined to give his company's name.

For high-tech firms, much of the enthusiasm behind the emerging wearable devices comes from the prospect of a bountiful data platform. Companies providing software or making these devices see revenue potential in helping customers store and manage data.

In the Wednesday keynote speech, Sundar Pichai, Google's senior vice-president of Android, Chrome and Apps, said that Google would share basic design building blocks of smart phones with manufacturers in developing countries. Its platforms of release include Mobile Momentum, platform evolution and developer success.

According to Pichai, Google's global smartphone shipments reached 315 million in Q4 of 2013, and its Android tablet activations had an increase of 62 percent in 2014. The 30-day active Android users reached 538 million in 2013, and its 30-day active users on Android platform has reached 1 billion.

"We are pooling our resources together to work on a set of platforms including high quality smartphones, turnkey solutions for our OEM vendors and initiate partnerships on software to innovate our user friendly experience," said Pichai.

Kun Wu, senior project leader of Shanghai-based TouchPal, a mobile software developer running on multiple platforms including Android, iOS, Windows Mobile and Windows 8, said he was impressed by all the new products.

"The new announcement gives us better ideas of what kind of new services are delivered on Google's Android platform, which is the most used platform in China," said Wu.

Avi Greengart, research director at Current Analysis based in New York, said Google's release shows "a new, graphically consistent version of Android coming later this year, and extending Android from phone to tablet, TV, car and wrist. However, it did not talk about Glass, Nest, Google+, or Search. Nor did it talk about expanding its presence in China with Lenovo."

Source: ChinaDaily USA

Overseas services boosted by Alipay

Alipay, the e-payment arm of China's Internet giant Alibaba Group, is boosting its global presence amid a rising appetite for overseas shopping by increasingly wealthy but choosy Chinese consumers.

Alipay, the largest third-party payment solution provider in China, announced on Wednesday a partnership with the United States online payment startup Stripe.

Under the agreement, overseas merchants who use Stripe's payment software can now detect if shoppers are located on the Chinese mainland and give them the option of paying through their Alipay accounts.

The move is expected to be warmly welcomed by Chinese shoppers who are not happy with providing their credit card details to overseas websites but who use Alipay as an alternative payment solution.

Li Jingming, head of Alipay US, said in an e-mailed statement to China Daily that there is a huge demand for high-quality Western products and services in China.

"We're excited to be cooperating with Stripe in helping to accelerate the introduction of Western brands into China and in turning global online shopping into a simple and enjoyable experience for Chinese consumers," he said.

Stripe didn't disclose the number of merchants Alipay is cooperating with, but said it now allows online merchants to conduct transactions using 139 currencies and bitcoin, a virtual currency. It also plans to form more partnerships with popular payment providers in regions where credit cards are not widely used, according to media reports.

Source: Chinadaily USA

Chile eyes better regional power connections -energy minister

A more interconnected Latin America is an important part of the new Chilean government's strategy to boost the availability of power in the country, energy minister Maximo Pacheco said on Thursday.

The government is pushing forward with talks with Peru, Ecuador and Colombia to create an interconnected electricity grid, a project slated to begin operating in 2020, Pacheco said in a meeting with journalists.

"I don't think it's good for Latin America to have closed grids, to not be interconnected," he said.

In answer to a question as to whether Chile may be looking to build closer energy ties with Peru, now that a long-running dispute over maritime boundaries has been settled, Pacheco said:

"I think that obviously it's interesting for us to follow closely what Peru is doing with its gas development."

Chile has also not ruled out natural gas swaps with Argentina, Pacheco said. Chile previously imported much of its gas from Argentina, but it has increasingly turned to liquefied natural gas imports from outside the region after Argentina drastically cut supplies more than a decade ago.

Boosting LNG imports is a key part of the energy reform plan of President Michelle Bachelet, who took office in March. She needs to balance the demands of the country's crucial power-hungry copper mining industry with public opposition to coal-fired and large-scale hydroelectric energy projects seen by many Chileans as environmentally damaging.

As part of that plan, a new, third LNG terminal will be built in central-southern Chile, she said last month. 

The government is expected to make a decision by the end of 2015 on the involvement of state-oil company ENAP in the project, Pacheco said.

"We are going to evaluate with total pragmatism if that project needs state participation or not," he said, adding that the government was eyeing various possibilities in relation to the size and location of the plant.

Source: Reuters

Petrobras board member lashes out at government over oil plan

A board member of Brazil's state-run Petrobras lashed out at the government on Thursday and said he may ask the country's securities regulator to sanction the oil company for failing to inform him and other board members of a 15 billion real ($6.8 billion) oil-rights purchase plan.

Board members Silvio Sinedino and Mauro Cunha told Reuters on Thursday that they knew nothing of a government plan to sell as much as 15.2 billion barrels of offshore oil rights to Petroleo Brasileiro SA , as Petrobras is formally known, until it was announced in a securities filing on Tuesday.

Sinedino said he is considering a complaint to securities regulator CVM because of the government's heavy hand in the company's affairs under President Dilma Rousseff. On her watch, Petrobras has become the world's most indebted and least-profitable major oil company.

"I'm not against buying the oil, I'm just not sure the terms are a good deal," Sinedino said. "The government has been doing everything it can to suck money out of Petrobras to balance its own books."

A senior government official, speaking on condition of anonymity, told Reuters that government officials who drafted the plan felt they had no need to inform the Petrobras board.

Petrobras shares have slipped 5.4 percent since the decision. A Petrobras spokeswoman declined a request for comment.

While the government owns a majority of voting shares, non-government investors own most of the company's capital, but most of that is made up of non-voting preferred shares.

"If the government finds the minority shareholders or employee representatives or the by-laws to be a nuisance they have a remedy: they can fully nationalize the company, buy up the minority shares," said Sinedino, who represents Petrobras' union employees on the board.

"But as long as they have minority shareholders, they have to obey the rules," he added.

In addition to paying the government about 15 billion reais by 2018, the plan increases annual Petrobras spending by about 3 percent and requires the purchase of billions of dollars worth of oil production vessels and equipment.

On Tuesday, Petrobras Chief Executive Officer said that the plan had been under discussion for two years. It was approved by the country's National Energy Council earlier on Tuesday.

This latest move comes as the government's refusal to let Petrobras raise domestic fuel prices in line with world prices has led to large losses on fuel imports. This has caused the company's debt to soar beyond its own internal limits as it seeks cash to pay for a $221 billion five-year expansion plan.

Cunha, who represents minority shareholders on the board and is also a member of the company's fiscal committee, voted against approval of the company's 2013 results earlier this year after complaining that the company did not give him or his colleagues sufficient time to review them. 

Source: Reuters

It's time to separate myths from reality in LNG by Clyde Russell

The gap between perception and myth in liquefied natural gas (LNG) is widening, with both buyers and suppliers appearing to subscribe to views that bear limited resemblance to reality.

This dynamic was very much in evidence at this week's Australian Gas Export Outlook (AGEO) conference in Brisbane, where buyers appeared confident that a wave of new projects around the world would leave them spoilt for choice of supply, and at lower prices.

Producers labour under the impression that Asian demand, led by China, is a bottomless pit that will suck up all the LNG they can make, while still earning high, oil-linked prices.

The outlook for LNG is confused and the industry isn't being well served by the lack of clarity.

It's time to try and debunk some of the myths.


Myth 1: A wave of LNG is coming from global projects

At the AGEO meeting this week, senior representatives from a major Japanese LNG buyer and an Indian buyer spoke of the increased supply expected from the United States, Canada and East Africa.

They spoke as if the projects that have been proposed are all likely to become reality, and within the timeframes mooted.

This is extremely unlikely, and what appears to have happened is that project developers have proposed so many new plants that buyers seem convinced they are about to be swamped with offers.

The reality is likely to be far more sobering.

What is certain is that global LNG supplies will get a substantial boost between now and 2019, as the seven projects now being built in Australia come into production.

These will take Australia's annual output to more than 80 million tonnes, so that it overtakes Qatar as the world's top producer.

It is also certain the first U.S. project, Cheniere's Sabine Pass, will start in that timeframe, ramping up to a total of 20 million tonnes.

These projects, and a handful of others now being built, are likely to lead to a small market surplus of LNG around 2018.

But buyers' expectations of a sustained surplus are built on huge new supplies coming on stream in the United States, Canada and the East African nations of Mozambique and Tanzania.

The U.S. Federal Energy Regulatory Commission (FERC) approved construction of Sempra Energy's Cameron plant on June 19, the second such approval after Sabine Pass.

This makes it likely that Cameron LNG will proceed to final investment decision (FID) and start construction.

There are three other projects awaiting FERC approval, and assuming this is granted and the plants are built on announced timelines, U.S. exports will be around 67 million tonnes per annum by around 2020.

Beyond that there is potential for another 220 million tonnes capacity, but whether this is approved and built is very questionable.

Several problems come to the fore. The approval process is likely to change, requiring projects to pay for expensive FERC approval prior to that from the Department of Energy.

Most of these proposed projects don't have committed buyers, or gas supply. Rather many are so-called tolling projects that merely charge for the liquefaction process, with the sourcing of feedstock gas and shipping being buyers' responsibility.

This leaves them highly exposed to U.S. Henry Hub gas prices , which are now about $4.58 per million British thermal unit. However, many analysts believe the trend is higher over the coming years, and U.S. gas prices also suffer from seasonal or weather-event-related spikes.

Canada's regulator has approved plans for nine projects totalling 145.3 million tonnes a year, but only the Chevron-led Kitimat venture is close to taking FID, and even it faces numerous hurdles.

One of these is support from Canada's First Nations, the Aboriginal people across whose land gas pipelines and other infrastructure must be built.

This is proving hard to get, not only for the Kitimat project, but for virtually every other proposal.

The Canadian ventures also lack sufficient firm sales contracts, meaning bankers may be reluctant to finance projects in the absence of a guaranteed revenue stream, even if the economics look viable.

In Mozambique and Tanzania, the only certainty is that large discoveries of offshore gas have been made.

The rest of the proposals there are just ambitious plans, notwithstanding the involvement of serious industry players, such as Anadarko , Norway's Statoil and Exxon Mobil .

Uncertainty over regulatory frameworks and concern over corruption are common to both East African nations, as well as an almost complete lack of any infrastructure in the remote areas where the plants are proposed for construction.

Mozambique LNG's website is still saying it's targeting first cargoes in 2018, but this must be very unlikely, given its current lack of progress.

Overall, once the projects already being built and up to four or five more in final stages of planning in the U.S. are on line, there isn't much in the way of confirmed new supply on the horizon.


Myth 2: U.S. LNG will force LNG prices in Asia lower

This myth is based around the wide gap between U.S. natural gas prices and long-term, oil-linked contract prices in Asia, with Japanese buyers typically paying an average of around $15 to $16 per mmBtu, almost four times the Henry Hub price.

Since U.S. LNG projects can source gas at U.S. prices, the theory goes that adding in liquefaction and transport costs of around $7 per mmBtu, takes the cost of LNG delivered to Japan from the U.S. Gulf Coast closer to $11 per mmBtu.

There are several problems with this, the most obvious being that U.S. producers will sell at a steep discount to Australian and Middle East suppliers.

Rather, it's more likely they will sell at a cost just fractionally cheaper than rivals, so allowing them to maximise profits while ensuring market share.

This myth also works on the assumption that U.S. gas prices will remain low for decades. However, the risk must be for them to rise as increasing demand from electric utilities, industrial users, transport and residential customers starts to soak up even the huge amounts of available shale gas.

It is likely the entrance of U.S. LNG to the Asian market will force changes to the market, perhaps by ending destination clauses and by reducing, or even ending, oil-linked contracts.

But sharply lower prices are not as likely as buyers hope, and even if they were delivered, it would only be for a very short period as new LNG capacity would simply not be built and existing capacity would idle, or run at reduced rates.


Myth 3: China will buy whatever can be produced

China has a pollution problem and needs cleaner energy. That's not a myth, but the belief that the Chinese will be prepared to use ever-increasing amounts of expensive LNG is probably about as hopeful as the iron ore miners who saw demand rising for decades to come.

Yes, China is building re-gasification terminals at a rapid rate, with 50.2 million tonnes under construction or approved, more than doubling the existing 31.1 million tonnes.

There are plans for a further 29.5 million, but even if all this capacity is added, it's by no means certain all will be used.

Chinese demand is likely to reach some 60 million tonnes around 2020, but this can easily be met from new supply already being built.

Additional demand will be added by new import facilities in Southeast Asian countries such as Singapore, Malaysia, Indonesia and Thailand, but again this is likely to be met.


Myths, if widely believed, distort markets and LNG appears to be in this category. Buyers awaiting cheaper LNG have to realise this is unlikely, unless investors with billions of dollars are prepared to back risky projects in the United States.

Project proponents need to do a reality check on the likelihood of finding stable, committed buyers willing to pay prices high enough to justify massive initial investments.

This isn't to say more projects won't be built, but only developments in the United States, Canada, East Africa and elsewhere that offer compelling economics will go ahead, and there won't be that many of them.

Source: Reuters

More investors plan to overweight commodities -Credit Suisse

More investors plan to ramp up on commodities over the next 12 months after years of pessimism toward the sector, betting that the Iraq conflict will push oil prices higher while other commodities prices advance in volatile trade, a Credit Suisse poll showed on Thursday.

The Swiss bank said it found a favorable view developing toward commodities at a conference in New York this week, when it surveyed 350 investors, including institutions, hedge funds, family offices, mutual funds and corporate firms.

A year ago, the bank said most investors at a similar Credit Suisse conference expressed reservations on commodities.

"The majority of attendees continue to be underweight or neutral commodities," the bank said in its latest poll.

"However, when asked 'What do you expect your level of investment to be over the coming 12 months?', 42 percent of respondents said 'overweight,'" Credit Suisse said, up sharply from the 19 percent who expressed such optimism in 2013.

Commodities have had a mixed year, with oil and gold prices moving higher lately after being rangebound for months.

The 19-commodity Thomson Reuters/Core Commodity CRB Index <.TRJCRBTR> is up 11 percent on the year, after strong first-quarter gains in energy prices. The U.S. The S&P500 index <.SPX> for U.S. stocks is up just 6 percent.

Credit Suisse said 30 percent of the investors it surveyed expected benchmark Brent crude oil to trade at $120 a barrel and above over the next year, marking a high since April 2012.

On Thursday, Brent settled down 0.7 percent at $113.21 a barrel. A week ago, it hit a nine-month high of $115.71 on fears that fighting in Iraq could split the country and hurt oil exports.

"Most attendees appeared to view the current crude price risks as skewed to the upside", Credit Suisse said, adding they also noted "how thin spare capacity has become in the system and the danger of further supply disruptions in Iraq or elsewhere".

The investors were also of the view that commodities were becoming appealing again to those wanting a balanced portfolio as correlations between raw materials prices and equities had broken down, making diversification integral.

There was also "strong consensus that commodity volatility was likely to be higher" and that "fundamentals have come back to the fore" to drive prices higher, it said.
Source: Reuters

Gazprom seeks HK listing, may use yuan in China gas deal

Russia's Gazprom has held talks about a Hong Kong listing and may use the yuan currency in a recently agreed gas deal with China as it looks to strengthen its foothold in energy-hungry Asia.

Moscow has looked east for new business and energy deals as relations with the West deteriorate. China and Russia signed a $400 billion gas supply deal in May, linking Russia's huge gas fields to Asia's booming market for the first time.
Gazprom listed its American Depositary Receipts (ADRs) on the Singapore stock exchange last week , giving it greater access to Asian investors. Its American Depositary Receipts (ADRs) are already listed in London .

"We are in talks to add a listing on the Hong Kong stock exchange. The next step is upgrading the level of our listing in Singapore," Gazprom Chief Financial Officer Andrei Kruglov said at a briefing for reporters on Thursday.

He said Gazprom was preparing to receive payments in Chinese yuan for supplying gas to China. The Kremlin-controlled company plans to sell 38 billion cubic metres of gas a year to the world's most populous country from 2018.

Gazprom would be the third Russian company to list in Hong Kong, joining aluminium producer United Company Rusal Plc <0486.HK> and mining company IRC <1029.HK>.

Rusal raised $2.2 billion when it floated 11 percent of its shares in Hong Kong in January 2010 at HK$10.80 each. The IPO received heavy scrutiny from Hong Kong's financial regulators partly due to the company's debt load and retail investors were eventually barred from taking part in the IPO.

Gazprom has said it will invest $55 billion in pipeline infrastructure and gas field developments to secure gas shipments to China, and Russian President Vladimir Putin has floated the idea of a Gazprom recapitalisation to finance it.

But Kruglov said the company wanted to increase gas tariffs, which have been capped by the state to cool inflation, and may do without a recapitalisation to fund its Chinese ambitions.


REBATES

Another Gazprom official said on Thursday that Gazprom expected back payments to European customers as a result of contract revisions to total around $1 billion in 2014.

Gazprom has been in a dispute with some European buyers over prices, as its long-term contracts are traditionally linked to the oil price, while buyers have been pressing for a greater emphasis on spot gas prices to cut bills.

It has agreed to amend some contracts, lower the price and make what it calls "retroactive payments" to European companies.

The latest such deal was with Italy's Eni .
Kruglov said Gazprom's core earnings this year were likely to be "at least" $55 billion, down from $63 billion in 2014. "It is a conservative scenario," he said.

"It could be that they expect a decrease in gas exports to Europe," said analyst Alexander Fak at Moscow-based Sberbank CIB. He said the brokerage had forecast Gazprom’s core earnings at $58-$59 billion.

Gazprom said this month it expected gas exports to Europe of 158.4 billion cubic metres, down from 162 bcm in 2013.
Source: Reuters

Airbus poised to revamp A330 with Rolls-Royce

Airbus is very close to a decision to upgrade its A330 with engines provided by Rolls-Royce , setting the stage for a bitter new phase in a battle for wide-body jet orders with Boeing's 787 Dreamliner, people familiar with the matter said.

The move will strengthen a growing strategic pairing between the European companies, with General Electric - the main alternative engine supplier on the existing version of the jet - no longer seen as a contender to take part in the $2 billion project, provisionally dubbed "A330neo", they said.

The people, asking not to be named, said the go-ahead with Rolls-Royce as sole supplier for a new version of the A330, offering up to 14-15 percent in fuel savings with the help of new wingtips, remains subject to Airbus Group board approval.

Board members at the Franco-German group are expected to meet in coming days ahead of the July 14-20 Farnborough Airshow, which is usually the showcase for major launch announcements.

However, it remains unclear whether Airbus will officially unveil the new project at the world's premier aviation event, since it usually waits to have orders in the bag first.

Purchasing decisions are expected later this year from some potential key launch customers such as Delta Air Lines , which is currently replacing Boeing 767 and 747 jets.

Airbus, which has promised investors a decision this year on whether to revamp the 253-295 seat A330 passenger jet, said none had been taken so far.

"We will have a comment when we have a decision. There is no decision yet," a spokesman said.

Rolls-Royce said it was "not aware" of a final A330 decision having been reached, and that any announcement would come from Airbus. GE reiterated it had offered its GEnX engine for the revised jet, but declined to comment on the commercial talks.

The A330 first entered service 20 years ago and had been expected to be overtaken by a new generation of carbon-composite jets like the 787 Dreamliner, and soon the Airbus A350.

Following a three-year delay to the 787's arrival, sales of the A330 held up better than expected.

But the backlog of undelivered aircraft has been dwindling as the 787 recovers momentum, and Airbus is keen to inject new life into its most profitable wide-body jet.


PRICE, AVAILABILITY

The move raises the prospect of a potentially bruising transatlantic battle for sales at the lower end of the market for wide-body jets, which ranges from the 230-250 seat A330-200 and 787-8 to the 525-seat A380 superjumbo.

Airbus has said it will offer the refreshed A330 at significantly lower prices than the 787 and match the newer plane's performance per seat on most key routes.

Boeing denies this but is preparing to put up a fight, with its sales chief telling Reuters earlier this month that it would

"react" to the relaunch of the A330.
Industry experts have speculated that Boeing could respond by changing its one-size-fits-all 787 pricing strategy by offering different prices for different levels of performance - a move sometimes interpreted as a form of discounting.

But the U.S. planemaker is also expected to look just as hard at ways of increasing availability of the 787, which is mostly sold out until around the end of the decade. Boeing produces 10 787s a month but targets 14 a month by end-decade.

Both planemakers will be under pressure from investors to prevent the contest developing into a price war that might destabilize wider pricing and undermine profitability goals.

The A330neo is expected to be launched in two versions, updating the A330-200 and A330-300.

One casualty will be the smallest member of the Airbus A350 family, the slow-selling 270-seat A350-800, which faces the axe.

The re-engined A330 is accordingly expected to be marketed as the entry point for Airbus's wide-body portfolio, prompting some in the industry to give it a different name: A350-200/300.
Source: Reuters

Gazprom in talks to buy Abu Dhabi's OMV stake-source

 Gazprom is in talks to buy a 24.9 percent stake in Austrian oil and gas firm OMV , a source familiar with the talks told Reuters, a deal that would deepen already controversial Austro-Russian ties if it comes to fruition.

Buying the stake would give state-controlled Gazprom a beachhead in the European Union, which has serious issues with its planned gas pipeline through central Europe to Austria and has imposed sanctions over Russia's annexation of Crimea.

"Talks were held but they have yet to decide on pricing," the source said.

Austrian state holding company OIAG, which holds 32 percent of OMV in a shareholder pact with Abu Dhabi's International Petroleum Investment Co (IPIC) and coordinates any shareholding changes, said it had seen no sign IPIC wanted to exit.

"It's news to me," Siegfried Wolf, an Austrian businessman with close ties to Russia who was elected OIAG chairman on Thursday, told a news conference.

But he said OIAG, which has right of first refusal to buy the stake from IPIC, would not necessarily know about any such talks until the point at which IPIC was ready to sell. He added he had not spoken to IPIC about the issue.

A Russian gas industry source dismissed as "rubbish" prospects that Gazprom would buy the stake in OMV, with whom it signed a pact this week to build a branch of the disputed South Stream pipeline to Austria. [ID:nL6N0P53C6]

Veteran Austrian opposition lawmaker Peter Pilz told Kurier newspaper and Reuters he had "concrete indications" that IPIC and Gazprom had held discussions on the issue.

Gazprom and IPIC declined to comment, while OMV referred questions to its major shareholders. Shares in OMV closed up 2.9 percent at 33.085 euros, making a 25 percent stake worth around 2.7 billion euros ($3.7 billion).


CONFLICT OF INTERESTS?

"As a shareholder of OMV, Gazprom would get closer control over the construction and operations of the South Stream pipeline," said Mikhail Korchemkin, director of U.S.-based consultancy East European Gas Analysis.

"However, there may be a conflict of interests, because Gazprom would be buying gas from itself."

Another analyst said: "Strictly from the share-price point of view, I don't see much difference whether IPIC or Gazprom would hold the stake. But if Gazprom were to make an offer for the whole company, of course that would be a different story."

The analyst did not want to be named because of the political nature of the issue.

OMV was the first western company to sign a long-term gas-purchasing contract with the then-Soviet Union in 1968 and is still a major Gazprom customer.

Pilz said he was concerned about creeping Russian influence in Austria, whose president defended hosting a controversial visit by Russian President Vladimir Putin this week, saying talks were more fruitful than sanctions.

IPIC, which has held its OMV stake for 20 years, owns stakes in a number of European companies, including Spain's Cepsa. It also owns part of Italian lender UniCredit through its Aabar Investments unit.

The fund is part of a stable of government-owned investment funds tasked with aiding the diversification of the Abu Dhabi economy away from hydrocarbon revenues.
Source: Reuters

BNP Paribas may face 1-year ban on processing some dollar payments-sources

BNP Paribas is likely to be suspended from converting foreign currencies to dollars on behalf of clients in some businesses for as long as a year, according to sources familiar with the matter, an untested and severe penalty for the French bank accused of persistently violating U.S. sanctions laws.

The New York State Department of Financial Services, headed by Benjamin Lawsky, is near a deal with Paribas on the ban on currency conversions, known as dollar clearing, people said. The bar would be the first of its kind for a global bank.

The temporary ban is expected to be limited to certain business lines related to the underlying transactions in question, and it would span various geographic regions, one of the sources said on Wednesday. Business lines that have come under scrutiny include oil trade financing.

"It won't be a death mallet, but it's a serious hit," the source said.

BNP clears hundreds of billions of dollars through New York every day, according to sources, serving customers in trade finance and commodities businesses, custodian accounts and foreign exchange.

Much business worldwide is done in dollars, and dollar clearing is a key banking activity.

It is unclear when the ban would take effect. It may be phased in, another source said on Wednesday.

It's also not clear if Paribas has found a workaround to soften the blow, such as identifying another bank to temporarily meet clients' needs.

Lawsky's office proposed the suspension as one condition for not revoking Paribas's license to operate in New York in light of the lengthy alleged violations, Reuters reported last month. At that time the length of the possible ban was not clear.

The bank is also expected to plead guilty to a federal criminal charge and pay nearly $9 billion as part of a larger settlement with multiple enforcement authorities that could be announced as early as next week, sources said.

Spokespeople for the bank, federal prosecutors and New York's banking regulator declined comment. The bank's chief executive, Jean-Laurent Bonnafe, told shareholders in May that the bank had improved its control operations to avoid sanctions-related failures in the future, without providing specifics.

U.S. authorities are probing whether BNP evaded U.S. sanctions relating primarily to Sudan, Iran and Cuba between 2002 and 2009.

The investigation has turned up some $100 billion in transactions processed by BNP that disguised identifying information in order to pass through the U.S. financial system without raising red flags, Reuters has reported. Around $30 billion of the transfers specifically violated U.S. sanctions, one of the sources has said.


SOFTENING THE BLOW?

Bank of France Governor Christian Noyer warned earlier this month that a threat to BNP's dollar-clearing operation "could put the smooth functioning of the international financial system in danger." [ID:nL5N0OS5M5]

The bank is one of 50 participants in the Clearing House Interbank Payments System (CHIPS), the largest private-sector U.S.-dollar funds-transfer system in the world, which clears an average of $1.5 trillion in payments every day.

Banking experts have said it's hard to quantify the impact of a temporary dollar-clearing ban. The experts note that it could be hard to win customers back after they have turned to other banks to meet their dollar-clearing needs.

BNP could ask another institution to take on its dollar clearing temporarily as a so-called correspondent bank. But doing so might still result in an exodus of clients and additional headaches for those clients who do stay, according to industry experts.

Clients who stick with BNP may face additional costs and prolonged transaction times, as the correspondent bank will likely subject them to greater scrutiny, said George Thomas, principal of Radix Consulting, which advises financial services firms on payments issues.

Standard & Poor's earlier this month said it may lower BNP's long-term credit rating because the potential penalties could hurt the bank's capitalization and "disrupt some of its banking activities."
Source: Reuters

Brazil central bank cuts 2014 GDP growth view, sees inflation easing

 Brazil's inflation will start to subside next year after economic growth slows further, the central bank said on Thursday, reinforcing expectations that it will not raise interest rates in the near future.

In its quarterly inflation report issued on Thursday, the bank lowered its 2014 economic growth forecast to 1.6 percent from 2 percent previously, faltering from 2.5 percent growth last year.

The central bank said the annual inflation rate will likely drop to 5.1 percent in mid-2016 from an expected 6.4 percent at the end of 2014, edging closer to its 4.5 percent target under a scenario of keeping current interest rates steady until then.

"It confirms that the benchmark interest rate will remain unchanged for a very long time," said Cristiano Oliveira, an economist with Banco Fibra, in Sao Paulo.

The bank's benchmark lending rate is currently at 11 percent after nine consecutive increases through April.

Weak economic growth and stubbornly elevated inflation have weighed on President Dilma Rousseff's campaign for re-election. Although unemployment remains low, her popularity has dropped steadily in recent months, pointing to a hotly contested run-off vote in October.

Even with its downward revision to the 2014 growth outlook, the central bank's view is rosier than market expectations of 1.2 percent in a weekly poll.
For 2014, the bank sees investment slumping 2.4 percent, down from an expected increase of 1.0 percent seen in its previous quarterly inflation report, issued in March.

Manufacturing is expected to drop 1.9 percent, and construction is forecast to shrink 2.2 percent.

"Considering growth expectations for the next quarters, measures of economic slack tend to be disinflationary," the bank said in the report, referring to a gauge of slack in the economy.

Most economists expect the central bank to keep interest rates steady through this year but increase them slightly in 2015, when the government is expected to yield to pent-up inflationary pressure in the energy sector and raise gasoline prices and electricity rates.

The central bank acknowledged such pressures and said it will remain vigilant but noted that they will likely be temporary.

"Current inflation drivers ... tend to retreat or even disappear through the period that is considered in monetary policy setting," the central bank said.

"Inflation will be resistant in coming quarters," it said.

"But if monetary conditions are maintained, it tends to converge towards the target in the final quarters of the forecast scenario" through mid-2016.

Source: Reuters

South Korea May factory output worst in over 5 years on poor exports

South Korea's industrial output fell by the most in more than five years in May from the previous month, data showed on Friday, far missing market expectations and adding to signs the economic recovery may be losing steam.

The industrial output index fell by a seasonally adjusted 2.7 percent from April, the fastest monthly decline since a 10.5 percent drop in December 2008, data from Statistics Korea showed.

The median forecast in a Reuters survey of economists was for the industrial output index to decline 0.5 percent in May on-month, although the forecasts were wide from a 3.7 percent fall to a 1.0 percent gain. [ID:nL4N0P60EZ]

Underscoring the weakness in manufacturing activity, the April industrial output index was revised down to show a 0.1 percent drop on-month, compared with the preliminary 0.1 percent gain reported, the data from Statistics Korea showed.

Analysts said poor exports in May led to the disappointing production activity across all the sectors, although some say distortions from long holidays during May exaggerated the situation.

"Basically weak exports in May led to soft output numbers. Half of what manufacturers make here are shipped abroad, so on top of fewer working days, that affected output," said Park Chong-hoon, economist at Standard Chartered Bank Korea.

On a year-on-year basis, industrial output fell 2.1 percent in May after a revised 2.5 percent rise in April, also well below a median 0.3 percent increase tipped by the Reuters survey.

The statistics agency data also showed that service-sector output rose by a seasonally adjusted 0.6 percent in May on a monthly basis after a revised 1.2 percent decline in April.

Tepid global demand and relatively lacklustre consumer spending at home have raised concerns of a rapid loss of momentum in Asia's fourth-largest economy this quarter following

strong growth over the past year.

Consumer sentiment has lagged in recent months as the public mood darkened after the April 16 sinking of a ferry that killed more than 300 people. The deadly accident - the worst in two decades - hurt domestic tourism and related services, putting a dampener on overall economic activity.

The central bank's latest monthly survey this week showed consumer sentiment rebounded in June after a sharp dip in May, but failed to return to levels seen before the April accident. 

The country's central bank chief, only in his third month in office, also flagged some signs of slippage in the local economy at his policy news conference earlier this month, saying the recovery in domestic demand had "paused". 
South Korea's economy grew 0.9 percent each in the first quarter of this year and the fourth quarter of 2013, slower than a 1.1 percent gain in the third quarter of 2013 but well above the 0.5 percent average rise seen in 2012.
Source: Reuters

Japan household spending falls, casts doubts on BOJ optimism

Japan's household spending unexpectedly fell in May as an increase in sales tax continued to hurt consumption, raising doubts about the Bank of Japan's optimistic economic outlook.

Other data showed Japan's core consumer inflation eased slightly in May when excluding the effect of a sales tax hike. It is seen slowing in coming months as the boost from a weak yen fades, but the moves in consumer prices are in line with BOJ forecasts.

The jobless rate fell to its lowest in more than a decade, while a measure of labour demand hit the highest in two decades, although it may take time for the strong labour market to lift consumer spending after the tax hike.

Separate data showed household spending continued to pull back in May after it was hit by an increase in the domestic sales tax on April 1, a weak omen for the economy.

The nationwide core consumer price index (CPI), which includes oil products but exclude volatile cost of fresh food, rose 3.4 percent in the year to May, data showed on Friday, matching the median market forecast.

That was the fastest since April 1982 as the sales tax hike pushed up prices across the board. In April, core consumer prices rose an annual 3.2 percent.

Excluding the sales tax hike, core consumer inflation stood at 1.4 percent, a tad slower than the 1.5 percent annual increase in the previous month.

The BOJ estimates that the sales tax rise to 8 percent from 5 percent, which took effect on April 1, would add 1.7 percentage points to Japan's annual consumer inflation in April and 2.0 points from May onwards.

Source: Reuters

Emerging market equities look cheap

It is best to buy investment assets when they cheap. What sounds like a truism can be a helpful guide for emerging markets. Shares in the MSCI basket of companies in the developing world trade at just under 11 times forecast earnings. That’s a 28 percent discount to equities listed in places such as London, New York and Tokyo.

The gap is unusually large. Though the discount widened to 33 percent in February this year, you have to go back to 2005 to find a similar-sized divergence, figures from Thomson Reuters Datastream show. However, it has been wider. In the 1990s, when the Asian crisis struck while the dotcom boom propelled Western shares upwards, the discount grew to more than 50 percent.

It's not surprising that there is a difference in valuations. Companies based in emerging nations are more vulnerable to political and currency risks, and less likely to be managed in the interest of public shareholders. Growth is also slowing: the World Bank expects the developing world's GDP to expand by less than 5 percent this year.

Even so, long-term earnings growth for emerging market companies will be as good as for the developed world, according to Starmine data. Both are forecast to achieve compound annual growth rates of around 8 percent over the next five and ten years.

It is becoming increasingly hard to generalise about emerging markets. The two countries with the biggest weightings in the 23-member MSCI index – China and South Korea - are as different as they are similar. There's little obvious common ground between Taiwan, Brazil and South Africa, the countries with the next largest weights.

The index also masks a wide range of valuations. Taiwanese and South African shares trade at price-earnings ratios in the mid-teens. Chinese stocks, on a forward earnings multiple of just 8 times according to Starmine, are discounting big doubts about future growth in the world's second-largest economy. They could enjoy striking gains if those risks recede. For different reasons South Korea, which is more developed than developing and trades on a forward price-earnings ratio of 9, looks great value.

Overall, now looks a good time to build up emerging market exposure.

Source: Reuters   by Robert Cole

Asia shares shaky, global bond yields down on growth concerns

Asian shares got off to a tentative start on Friday after a weak performance on Wall Street, and global bond yields dropped on creeping doubts on the strength of the U.S. economic recovery.

Japan's Nikkei <.N225> dipped 0.3 percent in early trade while South Korean shares fell 0.5 percent <.KS11>. MSCI's broadest index of Asia-Pacific shares outside Japan  was flat.

Thursday's data showing a milder-than-expected increase in U.S. consumer spending in May fanned suspicions on the strength of the U.S. economy following shockingly weak first quarter U.S. GDP data. 

The U.S. economy contracted at a 2.9 percent pace in the first quarter, the worst performance in five years.

"That's clearly a very weak figure. You can't just blame it all on bad weather," said Tohru Yamamoto, chief fixed income strategist at Daiwa Securities.

The weak data is starting to shake investors' conviction that the U.S. economy is heading for a modest but robust recovery this year.

"People are assessing where they think their second- and third-quarter, fourth-quarter, GDP estimates are going to be," said Wilmer Stith, co-manager in Baltimore of the Wilmington Broad Market Bond Fund.

"Even for those that are optimistic, it's like getting that

'F' in college in that first test; it's harder to raise that average up."

The S&P 500 <.SPX> slipped 0.1 percent while the pan-European FTSEurofirst 300 index <.FTEU3> fell 0.1 percent, hitting one-month lows.

Financial shares fell after New York's attorney general filed a securities fraud lawsuit against Barclays , accusing the British bank of giving an unfair edge in the United States to high-frequency traders.
Some traders also blamed hawkish comments from a Federal Reserve official for the weakness on Wall Street.

James Bullard, President of the St. Louis Fed, said that raising rates by the end of the first quarter in 2015 would be appropriate, based on his forecast that U.S. growth will register 3 percent for the next four quarters.

But his remarks were most likely used as an excuse for profit-taking in stocks, given they did not lead to any selling in U.S. bonds.

Indeed, the 10-year U.S. Treasuries yield fell to a three-week low of 2.516 percent on growth concerns.

Yields in Germany fell even more to a one-year low of 1.238 percent .

The U.S. dollar hardly budged, with the dollar index <.DXY> holding not far from one-month lows hit on Wednesday. It stood at 80.194, just 0.1 percent above Wednesday's low of 80.091.

A standout performer in the currency market was the Canadian dollar, which rose to six-month highs against the U.S. dollar after strong inflation data earlier this week raised doubts over how long the Bank of Canada will be able to stick with its neutral policy stance.

The Canadian currency traded as high as C$1.0684 on the U.S. dollar on Thursday and last stood at C$1.0693.

The yen also firmed in line with fall in U.S. bond yields, hitting a one-month high of 101.48 yen against the dollar . It last traded at 101.65. The euro was steady at $1.3612 .

Source: Reuters

U.S. crude and Brent fall as Iraq export fears recede

 Crude oil on both sides of the Atlantic fell on Thursday as fears eased over export disruptions from war-ravaged Iraq, allowing market participants to take some profit off the table.

Assurances from United Nations Iraq Special Envoy Nickolay Mladenov that Iraq's southern oilfields, which produce most of the nation's 3.3 million barrels per day, remained unaffected, cooled Brent prices. Iraq is OPEC's second-largest producer.

"I think you're seeing some profit-taking. The market's letting some pressure out," said Gene McGillian, an analyst at Tradition Energy in Stamford, Connecticut.

Brent has retreated from a nine-month high of $115.71 per barrel set a week ago on fears that the fighting in Iraq could split the country and hurt oil exports. 

Weaker-than-expected economic data from the U.S. pressured domestic crude prices, which had followed Brent's climb, reaching its own nine-month high on June 20.

"The [U.S.] economy is on tenterhooks and oil prices are very high," said Stephen Schork, editor of the Schork Report in Villanova, Pennsylvania. "It's getting to a point where oil is overbought."

Brent crude lost 79 cents to settle at $113.21, its lowest settlement since June 16.

U.S. crude lost 66 cents to settle at $105.84, the lowest settlement since June 11.

The spread between the two benchmarks narrowed to close at $7.37, after it had widened to $9.01 last week, its widest point since March.

U.S. equities fell following comments by St. Louis Fed President James Bullard that interest rate increases should come sooner rather than later, taking U.S. crude down alongside. [.N]



FIGHTING OVER BIG REFINERY

Insurgents and Iraqi government forces continued to fight on Wednesday for control of the country's largest refinery, the 300,000-barrel-per-day Baiji complex, and troops were airlifted to the site by helicopter.

Militants attacked one of Iraq's largest air bases and seized control of several small oilfields on Wednesday as U.S. special forces troops and intelligence analysts arrived to help Iraqi security forces counter the mounting Sunni insurgency.

Iraqi forces launched an airborne assault on rebel-held Tikrit on Thursday with commandos flown into a stadium in helicopters, at least one of which crashed after taking fire from insurgents who have seized northern cities.

Iraq's self-ruling Kurds outlined plans on Wednesday to ramp up oil exports since their forces have seized control of Iraq's main northern oilfields.

Oil output in Libya rose to 300,000 bpd after the El Feel field increased production, further pressuring prices.

DATA DISAPPOINTS

Michael Hewson, an analyst at CMC Markets, said disappointing U.S. economic data helped to cap oil prices.

U.S. consumer spending rose less than expected in May, which could prompt economists to temper their second-quarter growth forecasts.
The Commerce Department said on Wednesday gross domestic product fell at a 2.9 percent annual rate, the sharpest decline in five years, instead of the 1.0 percent pace it had reported last month.

"GDP growth was pathetic, and we shook it off yesterday, but I think it's definitely weighing on prices," said Phil Flynn, analyst with the Price Futures Group in Chicago, Illinois.

On Tuesday, the U.S. Department of Commerce ruled that some energy companies may export a variety of ultra-light oil if it has been minimally refined, in what may be a marginal loosening of a decades-old ban on selling U.S. crude abroad.

Enterprise Products Partners , one of two companies given Commerce Department approval to export condensate, said it could start exporting any time.

Source: Reuters