Zinc rallies, but is it another false dawn?: Home

 Zinc’s on a roll again.

On the London Metal Exchange (LME) three-month zinc has this week hit a 16-month high of $2,222 per tonne, eclipsing a first-quarter rally which stalled just shy of the $2,150 mark.

The galvanising metal has moved for the first time in two years to a premium to sister metal lead , although this may be as much to do with the heavy metal’s lethargy as anything else. Lead has done little more than shuffle sideways this year amid falling open interest and stagnant volumes.

Zinc, of course, has a compelling fundamental narrative of dwindling mine supply as some of the world’s largest operations come to the end of their natural life.

It is a story-line apparently echoed by the steady attrition of LME-registered stocks and monthly deficit headlines generated by the statistical updates from the International Lead and Zinc Study Group (ILZSG).

Yet both remain highly problematic market indicators, which is maybe why so few players are buying into the latest move.


HALF-HEARTED

One of the curiosities of the latest zinc price surge is the fact that it has happened without any discernible change in market open interest .

It was a very different story back at the end of last year and beginning of this, when zinc went on its previous upside excursion.

Open interest surged from under 400,000 lots in August 2013 to 486,000 lots in early January, coinciding with a price break up through the $2,100 level as speculative money flowed into the LME market to ride the bull story of mine supply shortfall.

By March both price and open interest had deflated in tandem as investors took profits and moved on to the next hot metals story offered by nickel after the Indonesian government’s ban on the export of nickel ore.


Right now open interest is still just over 400,000 lots and although there have been some minor flurries of activity, the market positioning landscape looks relatively featureless.

“The rally appears to be a bit half-hearted in nature,” concludes Leon Westgate, analyst at Standard Bank London, writing in the bank’s quarterly commodities review on June 27.

Drawing attention also to “pretty disappointing” volumes, Westgate suggests that “what does appear to have changed is that zinc is being traded on its own, or alongside lead, rather than against it as a relative value pair”.


LME STOCKS DOWN…OR ARE THEY?

Maybe the fact that zinc has been able to rally without any obvious speculative push is a positive sign that this market’s underlying deficit fundamentals are starting to assert themselves?

The only problem is that there is still scant evidence that there is any shortage of metal around.

LME stocks at 667,950 tonnes are still historically high and although they have fallen by over 260,000 tonnes this year, this may have very little to do with underlying market dynamics.

The biggest draws from the LME system this year have taken place at New Orleans, Detroit, Vlissingen and Antwerp, four warehouse locations characterised by load-out queues.

This means there is something of the rear-view window about current stock movements.

Take, for example, Detroit, where zinc has been leaving daily since late April, but where the last sizeable cancellations occurred all the way back in November. It’s taken that long for the zinc to get to the front of the aluminium load-out queue.

The picture is even hazier when it comes to New Orleans, where most of the LME zinc tonnage is concentrated and where most of what is there is being stored by Pacorini, the warehousing arm of Glencore.

A whopping 265,000 tonnes have been loaded out at New Orleans since the start of January but has the zinc actually gone anywhere other than across a white line into off-market storage? It’s a suspicion that is only reinforced by the occasional mass movement of metal in the opposite direction, such as the 147,000 tonnes that “turned up” at the port in March.

LME stocks can be a problematic indicator of market balance at the best of times. In the recent history of zinc, they have been near useless, given the prominence of New Orleans, an LME location far removed from any zinc consumption hub.


CHINESE STOCKS UP?

But what of those monthly updates from the ILZSG? Surely, they are a “true” indicator that this market is shifting from years of structural oversupply to shortfall?

The latest Group bulletin, covering the first four months of this year, assesses the global market as being in supply deficit to the tune of 107,000 tonnes.

But here the problem is also one of stocks.

Delving behind the ILZSG headlines reveals two very different dynamics at work. It is China that accounts for the global deficit calculation, while the rest of the world was in comfortable 145,000-tonne surplus over the January-April period.

And in China, as any copper trader can tell you, things get a bit statistically tricky. ILZSG, for example, uses an apparent consumption calculation, comprising production plus net imports plus/minus changes in visible stocks. On that basis “apparent” demand rose 12.4 percent in the first part of this year.

But, as sister organisation the International Copper Study Group has found out, builds in unreported stocks can seriously distort the mathematics. And particularly problematic are builds in bonded warehouse stocks, metal that has been counted as an

“import” by China’s customs department but which has made it only as far as the port bonded zone.

China has been a net importer of commodity-grade zinc for a long time, not necessarily to fill domestic market shortfall but to meet financial demand for collateral to be used in the country’s shadow lending market, a trade that has recently come under the spotlight in the wake of the Qingdao scandal.

Most metal collateral financing is in the form of copper, but zinc has garnered its fair share of the business.

Analysts at Macquarie Bank, for example, estimate that bonded warehouse stocks of zinc have grown from around 50,000 tonnes at the end of last year to over 240,000 tonnes at the end of May (“Zinc: strong rally ahead of the curve”, June 30).

That would account for a major part of the 311,000 tonnes of imports so far this year, serving to reduce ILZSG’s apparent demand indicator and its Chinese market deficit calculation.


A SLOW GRIND

All of which suggests there is a lot of surplus zinc still sloshing around the system, both in China and everywhere else.

That’s not to gainsay zinc’s background story of tightening mine supply but it’s to warn that this is going to be a long process, a slow grind rather than an explosion.

Even bullish analysts such as Stephen Briggs at BNP Paribas, argue that structural deficit won’t happen overnight. The first evidence might come as early as this year but the real impact will be felt next year and in 2016 (“Supply favours zinc over copper”, June 25, 2014).

Zinc’s bull story is a slow burner. Funds lost patience with it in the first quarter and there’s no sign they’ve changed their collective mind.

The recent price strength looks like another false dawn. There will be plenty more before this market enjoys its day in the sun.

Source: Reuters

Brent slips below $111 as Libyan PM declares oil crisis over

Brent futures dipped below $111 a barrel on Thursday as supply fears eased after Libya declared an end to an oil crisis that has cut exports from the OPEC member to a trickle, although declines will be capped by concerns over Iraq.

Libya's acting Prime Minister Prime Minister Abdullah al-Thinni said the government had reached a deal with a rebel leader controlling oil ports to hand over the last two terminals and end a blockade, making around 500,000 more barrels a day of crude available for export.

Brent crude extended the previous session's losses to fall to a three-week low, dropping 32 cents to $110.92 a barrel by 0230 GMT. U.S. oil declined 44 cents to $104.04, also sliding to a three-week low.

"Even if Libyan production comes back, it will still be only 40-50 percent of the country's full pre-crisis exports. That's a small number," said Tetsu Emori, commodity fund manager at Japan's Astmax Investment. "People are still looking at Iraq."

Oil investors are on edge over how the crisis in Iraq can be brought under control, Emori said. With limited global spare production to fill up any major disruption in shipments from OPEC's second-largest producer, prices will head higher later this month, he said.
Iraqi Prime Minister Nuri al-Maliki, who is fighting for his political life as a Sunni insurgency fractures the country, said he hoped parliament could form a new government in its next session after the first collapsed in discord. Baghdad can ill afford a long delay as large swathes of the north and west fall under the control of an al Qaeda splinter group. 

Prices are also being supported by an improving demand outlook in the United States and China, the world's top two oil consumers.

U.S. crude stocks fell more than expected last week as refineries hiked output ahead of the holiday July Fourth weekend, data from the Energy Information Administration showed on Wednesday.

Crude stocks fell 3.2 million barrels compared with expectations for a decrease of 2.2 million barrels. Gasoline stocks fell 1.2 million barrels versus forecast of a 400,000-barrel gain, it said.

Broader financial markets also gained on hopes of an improved economic outlook. Asian stocks hovered at a three-year high and the dollar rose early as a series of strong economic numbers point to momentum building in the economy.

WSJ: Argentine Consensus Emerges: Pay Off Debt

       The WSJ reports, "as Argentina struggles with a poor economy and the risk of default, a consensus has emerged among Argentines, business groups and ruling-party lawmakers that the government should settle a $1.5 billion debt with holdout bondholders—and do so soon.

President Cristina Kirchner's administration, which begins negotiating with a small group of hedge funds on Monday in New York, has until the end of July to reach a deal or default on its debt for the second time in 13 years.

That prospect, harrowing for a country with an economy in recession with one of the world's highest inflation rates, is prompting both Mrs. Kirchner's allies and foes to urge her to abide by a U.S. court order. The U.S. Supreme Court last month declined to review an earlier district court ruling. The ruling said Argentina must pay the hedge funds that sued to collect on defaulted bonds at the same time it pays investors who own bonds issued after the country's 2001 default".

"The solution is to reach an agreement, and an agreement obviously means paying," Daniel Scioli, governor of Buenos Aires province and a leading figure in Mrs. Kirchner's Peronist movement, said in a recent televised interview.

For years, Mrs. Kirchner vowed never to pay the investors she calls "vulture funds"—investment funds led by Elliott Management Corp. and Aurelius Capital Management LP, which snapped up defaulted bonds on the cheap in hopes of getting paid full face value.

Argentina's legal setback in the U.S. coincides with growing economic and political troubles here, most recently after Mrs. Kirchner's vice president, Amado Boudou, was indicted on bribery and influence-peddling charges. Her approval rating has sunk to 26%, the Management & Fit polling firm reported recently, and two-thirds of Argentines expect the economy to worsen over the next six months.

Settling the case would give Mrs. Kirchner's cash-strapped country, which has seen reserves fall to $29 billion from $53 billion in January 2011, access to financial markets for the first time since 2001.

Mrs. Kirchner has said recently that her government wants to pay off its debts, but her aides have said that settling with the hedge funds could trigger claims that would cost billions more.

"For me it would be very easy to promise anyone the moon," the president said in a recent speech. "But don't count on me to just do anything, but rather to do what I should do in meeting with my commitments—never to raffle off the fatherland."

"If the government doesn't reach a deal with holdouts, its legacy falls apart," said Nicolas Solari, a political analyst. "The government took over during a profound debt and default crisis a decade ago and always bragged about solving those problems. Now it would risk leaving power in the middle of another default and economic crisis."

Those who favor a settlement say Argentina has no other option.

"One way or another, we have to normalize this situation," said Eduardo Buzzi, head of the Argentine Agrarian Federation, a leading farm group representing small-scale farms nationwide. "It puts the economy at risk. If the country defaults, it will raise financing costs and raise uncertainty about the exchange rate."

And it isn't just companies that believe it's time for the government to swallow its pride. The polling firm, Poliarquia, recently released a poll showing that 80% of respondents are worried about a possible default and 65% say Argentina should simply pay up.

Many here believe that there are ample signs that Argentina is prepared to enter into negotiations, despite contradictory and nationalist rhetoric from high government officials.

On Monday, Argentina is sending a delegation to New York to meet with Daniel Pollack, an attorney appointed by Judge Thomas Griesa, who made the initial ruling, to oversee negotiations between the two sides. The talks begin a week after Argentina missed a deadline to pay both the holdouts and the other bondholders, setting the clock ticking on a 30-day grace period that Argentina has to settle. A settlement would be in line with Argentina's recent efforts to end other long-standing creditor disputes. In November, Argentina agreed to pay about $5 billion in bonds to Spain's Repsol for seizing its controlling stake in the oil company YPF.  Mrs. Kirchner's administration then agreed in May to settle a long-running dispute with the Paris Club group of creditor nations by paying $9.7 billion.

Lawyers representing the country in its dispute with hedge funds described those settlements as "breakthroughs" that reflect Argentina's desire to normalize ties with creditors.

"Argentina wants to emerge from the litigation that has burdened both it and the courts," the lawyers said in a recent letter.

A clear winner if Argentina settles is state-controlled oil firm YPF, which is seeking to develop huge oil and gas reserves in a desolate swath of the country's south. A default would raise YPF's financial costs just as its president, Miguel Galuccio, has been aggressively trying to court foreign investors.

But a deal in New York would cut borrowing costs by several percentage points, company officials say. A month ago, YPF sold 10-year bonds at an interest rate of 8.5%.

GLOBAL MARKETS-Asian stocks hover at 3-yr high, U.S. jobs data enthrall

 Asian stocks hovered at a three-year high and the dollar rose early on Thursday after robust jobs data fuelled hopes that the U.S. nonfarm payrolls report would point to momentum building in the economy.

MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> stood little changed at 499.88, within a short distance of a three-year peak of 500.26 reached the previous day.

Tokyo's Nikkei <.N225> gained 0.4 percent, buoyed by the weaker yen.

Asian equities received an early lift after the Dow <.DJI> and the S&P 500 <.SPX> closed overnight at record highs for a second straight day following data from payrolls processor ADP showing U.S. private-sector hiring hit a 1-1/2-year high in June. 
The upbeat ADP report heightened expectations that the all-important June U.S. nonfarm payrolls due at 1230 GMT would show the American economy gathering momentum after a dismal start to the year.

"The market is expecting to see another print north of 200,000 and no doubt sentiment will be riding high following this ADP reading," Stan Shamu, market strategist at IG in Melbourne, wrote in a note to clients.

A Reuters poll forecast non-farm payroll gains of 212,000.

The data will be released on Thursday because U.S. markets close for Independence Day on Friday, the day the report is usually released.

Investors are keeping an eye on the European Central Bank meeting later on Thursday. Market participants do not expect the ECB to do much after it launched a number of monetary easing measures last month.

The focus was on whether the ECB mentions quantitative easing or verbally warns against the strength of the euro, which has crawled higher against the dollar despite last month's easing.

The dollar inched up to 101.77 yen after gaining more than 0.2 percent overnight, helped after the benchmark U.S. Treasury yield rose to a 1-1/2 week high on the strong ADP report.

The euro stood little-changed at $1.3656 after shedding 0.15 percent overnight.

The Australian dollar fell 0.1 percent to $0.9435 , still on shaky ground after being knocked down from an eight-month peak the previous day on disappointing trade data.

Crude oil extended losses after falling the previous day on encouraging signs of supply from Libya and Iraq.

U.S. light crude fell 0.4 percent to $104.09 per barrel.

Source: Reuters

Yellen speech at the IMF: Fed should continue focus on jobs and inflation. Leave stability concerns to regulation

Federal Reserve monetary policy should continue to focus on jobs and inflation and leave stability concerns to regulation, Federal Reserve Chairwoman Janet Yellen said on Wednesday.

“I do not presently see a need for monetary policy to deviate from a primary focus on attaining price stability and maximum employment, in order to address financial stability concerns,” Yellen said in a speech at the International Monetary Fund.

Stocks barely reacted to Yellen’s remarks. Read live blog of stock market.

Yellen’s speech was a “pretty clear vote” for keeping monetary policy and financial regulation separate, said James Glassman, economist at J.P. Morgan Chase.

“It is a hornet’s nest to get into trying to understand what is a threat and what isn’t,” he added.

Many economists think the Fed should already have started to hike interest rates and failing to do so is fostering potential asset bubbles.

For example, former Fed governor Kevin Warsh, currently a fellow at Stanford University’s Hoover Institution, and billionaire investor Stanley Druckenmiller wrote an op-ed in the Wall Street Journal saying that ultra-loose Fed policy is spurring wasteful financial engineering instead of needed capital expenditures.

Another former Fed governor, Jeremy Stein, who left the Fed at the end of May, was a leader in urging the central bank to focus more attention on the “cost” of its bond-buying in terms of financial instability.

The central bank began cutting back its bond-buying program last December, and has reduced total purchases by more than half to a $35 billion-per-month pace.

Laura Rosner, an economist at BNP Paribas, said Yellen’s remarks are dovish because they lowered “the odds of the Fed tightening policy on the basis of financial stability concerns rather than their traditional dual mandate goals.”

“This was not our baseline expectation but has been a lingering risk ever since the Fed first began focusing on the ‘costs’ of accommodative policy, in addition to the benefits,” Rosner added in a note to clients.

Read recap of live blog of Yellen’s speech.

In her remarks, Yellen expanded on her existing stance that effective bank supervision must play the “primary role” in preventing future asset bubbles and crises.

“Monetary policy faces significant limitations as a tool to promote financial stability,” Yellen said.

She said the work on “building resilience” in the U.S. financial system was far from done.

Jaret Seiberg, a banking policy analyst at Guggenheim Partners, said Yellen took a “hard lined stance on capital, liquidity and leverage.” He noted that the Fed chairwoman repeated her call for reform on money market mutual funds.

Yellen pushed back on critics who argue that the financial crisis could have been avoided if the Fed had tightened rates at a faster pace in the mid-2000s.

“A tighter monetary policy would not have increased the transparency of exotic financial instruments or ameliorated deficiencies in risk measurement and risk management within the private sector,” Yellen said.

But she said she was also mindful of the potential for low rates to take on risk and reach for yield, as well as the limits of regulation.

So there “may be times” when interest rates should be raised to ameliorate emerging risks, she said.

Asked by IMF Managing Director Christine Lagarde about possible spillovers on emerging markets when the Fed exits its easy policy stance, Yellen replied: “I wouldn’t assume that this is going to go badly, and I can just say that we will do everything on our side to make sure that it goes smoothly.”

She pledged to communicate in a manner that will avoid surprising financial markets.

Q&A with IMF's A. Spilimbergo.Mission Chief to Russia. State of Russian Economy after Ukraine events.

IMF Survey: Russia is experiencing a period of slow growth. What factors are behind this, and what can Russia do to reverse the trend?

Spilimbergo: First, Russia’s growth model is based on energy exports, which were supported by significant oil price increases since 2000, and the use of spare capacity in the economy. Now that oil prices have stabilized and spare capacity has been exhausted, growth has slowed significantly. In fact, the entire economy hit capacity constraints in 2011, as evidenced by the beginning of the economic slowdown, while inflation remained elevated. Second, geopolitical uncertainties following Russia’s action in Crimea have recently depressed the economy further, with a particularly negative effect on investment.

Russia could implement a number of policies to improve its growth prospects. In particular, Russia needs more and better investment. This requires addressing problems of governance, corruption, administrative barriers, and regulation. While Russia has already implemented some policies to address the situation, much more remains to be done. Continued efforts at global integration are also needed to attract investment and foreign technology. Other areas where improvement is needed include reinvigorating the privatization agenda, improving competition, increasing the size and efficiency of the banking sector, and reducing price distortions, especially utility prices.

IMF Survey: What effect are the sanctions imposed by the United States, European Union, Japan, and other countries having on the Russian economy?

Spilimbergo: Responding to the situation in Ukraine, many countries and the EU adopted sanctions against Ukrainian and Russian individuals and entities. Concerns about the possible escalation of sanctions have increased the perceived risk of doing business in Russia, which is having a chilling effect on investment. Initially, capital outflows increased significantly and bond issuances by the government and Russian companies declined sharply, while borrowing rates increased markedly and the stock market declined. The tensions led to sharp pressures on the ruble, and Russia’s central bank increased interest rates, reduced the flexibility of the ruble, and used its foreign exchange reserves to support the ruble.

However, more recently, as the perceived risk of additional sanctions has subsided, we’ve seen the stock market and the ruble rebound and companies considering issuing bonds externally. Still, despite these recent positive developments, we think that uncertainties will linger as the perception of Russia by investors has changed, hampering growth in the short term and possibly the medium term.

IMF Survey: Like many other countries, Russia is reforming its public pension system. What reforms have been accomplished so far, and what remains to be done?

Spilimbergo: Let me say that, in Russia, as in many other countries, there is growing concern about the viability of the public pension system. In Russia, these concerns arise because of the expected adverse demographic dynamics and the statutory retirement age—60 for men and 55 for women—which is relatively low by international standards. In addition, many exemptions make the effective retirement age even lower than the mandatory ones.

In our view, the recent reform was timid and incomplete. It did not increase the statutory retirement age but introduced financial incentives to delay retirement and increased the minimum years worked required before claiming a pension. In addition, the reform also linked pension benefits to resources available in the pension fund, including government transfers. According to the Russian authorities, the reform is expected to lead to a gradual reduction in the generosity of benefits over time. However, we believe that this may eventually translate into pressure on the government to allocate more money to the pension fund, if the generosity of the system falls below what is socially and politically acceptable.

We think that additional measures are needed to ensure the long-term viability of the system while keeping its generosity at an acceptable level. These measures include increasing in the retirement age, encouraging the formalization of employment in the underground economy, and improving contribution compliance.

IMF Survey: How will Russia’s economy be affected by the difficult economic situation in Ukraine?

Spilimbergo: Clearly, negative economic developments in Ukraine, a neighboring country and trading partner, will affect Russia. However, the impact is likely to be moderate, reflecting the limited trade and financial links between the countries. For example, exposure of Russian banks to Ukraine is less than 2 percent of Russian banks’ assets and the share of Ukraine in Russian exports is less than 5 percent.

That said, given that about half of Russian gas exports to Europe go through Ukraine, disruption of gas delivery to Europe could have an impact on Russia, especially in light of the limited possibility of rerouting through other pipelines in the short run. Moreover, sectors like base metals, transportation equipment, and chemicals are closely-integrated, and disruption of these supply chains could have important impacts within these sectors.

Finally, lingering uncertainties about the situation in Ukraine could undermine the confidence of consumers and investors in Russia, which would further affect domestic consumption and investment.

IMF Survey: Which countries could be affected by the slowdown in the Russian economy?

Spilimbergo: So far, the impact on neighboring countries has been limited but a larger impact is possible. This reflects the fact that some neighboring countries have significant exposure to Russia through trade, financial links, and remittances. For example, countries that have a large trade exposure to Russia include Belarus, Estonia, Lithuania, Lithuania, Turkmenistan, Ukraine, and Uzbekistan. Other countries, like Armenia, Kyrgyz Republic, Moldova, and Tajikistan receive large remittances from Russia. Some financial centers, including Cyprus, Luxembourg, The Bahamas, Saint Kitts and Nevis, and Seychelles also have significant exposure to Russia through foreign direct investment.

Events in Ukraine could also lead to disruption of oil and gas exports from Russia. For example, Finland, the Baltic countries, Belarus, and Czech Republic rely almost entirely on Russian gas for their domestic consumption. Dependence is also high at 40–60 percent in central Europe and southeastern Europe. For these countries, disruption of gas exports by Russia could have significant impact on their economies.

iMFDirect: Slowdown in Emerging Markets: Not Just a Hiccup By Evridiki Tsounta and Kalpana Kochhar

"Emerging market economies have been experiencing strong growth, with annual growth for the period 2000-12 averaging 4¾ percent per year—a full percentage point higher than in the previous two decades. In the last two to three years, however, growth in most emerging markets has been cooling off, in some cases quite rapidly.

Is the recent slowdown just a hiccup or a sign of a more chronic condition? To answer this question, we first looked at the factors behind this strong growth performance.

Our new study finds that increases in employment and the accumulation of capital, such as buildings and machinery, continue to be the main drivers of growth in emerging markets. Together they explain 3 percentage points of annual GDP growth in 2000–12, while improvements in the efficiency of the inputs of production—which economists call “total factor productivity”—explain 1 ¾ percentage points.

We also found that the pickup in economic activity in the 2000s compared to the 1990s is solely explained by higher total factor productivity. After exhibiting declines in Latin America and the Middle East and North Africa in previous decades, total factor productivity is now on the rise in emerging market economies in all regions.

This is not an unusual development during good economic times. However, the improvements in productivity also reflect some structural (permanent) factors, such as the reallocation of inputs to more productive sectors and gains from past reforms (including from deregulation as well as trade and financial liberalization). All this is good news for emerging markets. 

   External factors account for a considerable part of this slowdown, although domestic factors also play a role. Whether the slowdown will persist depends on whether it has been driven by transitory (cyclical) or more permanent (structural) factors. Our study suggests that on average, cyclical and structural factors are equally important in explaining the growth slowdown in emerging markets over the last few years .

At the same time, our results suggest that emerging markets will have more difficulty sustaining the high growth rates of the 2000s in the next 3-4 years, as some of the slowdown reflects lower potential growth and is thus more permanent in nature. Estimates of potential growth rates in emerging markets for the next 3-4 years, at 3½ percent, suggest that growth would be on average 1¼ percentage points lower than so far in the 2000s, though the magnitude of the impact varies by country.

Several factors explain the anticipated slowdown in potential growth. First, investment (that is, the growth of the physical capital stock) is expected to moderate, as global interest rates which earlier facilitated large capital flows to emerging markets start to rise and commodity prices stabilize. In addition, natural constraints such as population aging will likely limit the contribution of labor in the coming years. Finally, in countries where external and financial imbalances were allowed to build, growth will have to slow as economies address risks to their balance sheets.

Structural reforms to the rescue

As a result, policymakers in emerging market countries will have to place renewed emphasis on structural reforms to raise productivity, which despite recent improvements remains relatively low compared to advanced economies (see a recent IMF paper for a discussion of tailored structural reforms)".

WSJ: Fed’s Yellen Says Regulating Shadow Banks a ‘Huge Challenge’

Federal Reserve Chairwoman Janet Yellen said Wednesday that regulating activity outside the traditional banking sector remains very difficult but the central bank has boosted its monitoring activities to stay on top of possible risks.

International Monetary Fund Managing Director Christine Lagarde asked Ms. Yellen in aquestion-and-answer session at the IMF what the Fed was doing to address risks from non-banks, which include hedge funds, private equity and derivatives.  Ms. Yellen replied: “You’re pointing to something that is an enormous challenge.”

“We simply have to expect that when we draw regulatory boundaries, and supervise intensely within them, that there is the prospect that activities will move outside those boundaries and we won’t be able to detect them, and if we can, we won’t have adequate regulatory tools,” Ms. Yellen said. “That is a huge challenge to which I don’t have a great answer.”

Ms. Yellen said the Fed’s monitoring of financial risks has improved greatly following the historic financial crisis of 2008. Policy makers were blamed for underestimating the potential for a meltdown during the precrisis period and particularly for failing to spot a massive housing bubble.

She said officials are trying to use tools, such as leverage ratios and margin requirements, that broadly address risk throughout the financial system.

“We have developed very active monitoring programs to try to be on the look out for the cause of the next crisis–hopefully many, many years in the future,” she said.

The Middle East and the Return of History . By Joschka Fischer*

BERLIN – Ever since Francis Fukuyama argued, more than two decades ago, that the world had reached the end of history, history has made the world hold its breath. China’s rise, the Balkan wars, the terrorist attacks of September 11, 2001, the wars in Afghanistan and Iraq, the global financial crisis of 2008, the “Arab Spring,” and the Syrian civil war all belie Fukuyama’s vision of the inevitable triumph of liberal democracy. In fact, history could be said to have come full circle in the space of a quarter-century, from the fall of communism in Europe in 1989 to renewed confrontation between Russia and the West.

But it is in the Middle East that history is at work on a daily basis and with the most dramatic consequences. The old Middle East, formed out of the remains of the Ottoman Empire after World War I, is clearly falling apart, owing, in no small part, to America’s actions in this conflict-prone region.

The United States’ original sin was its military invasion of Iraq in 2003 under President George W. Bush. The “neoconservatives” in power at the time were oblivious to the need to fill the power vacuum both in Iraq and the region following the removal of Saddam Hussein. President Barack Obama’s hasty, premature military withdrawal constituted a second US failure.

America’s withdrawal, nearly coinciding with the outbreak of the Arab Spring and the eruption of the Syrian civil war, and its persistent passivity as the regional force for order, now threatens to lead to the disintegration of Iraq, owing to the rapid advance of the Islamic State in Iraq and Syria, including its capture of the country’s second-largest city, Mosul. Indeed, with ISIS in control of most of the area northwest of Baghdad, the border between Iraq and Syria has essentially ceased to exist. Many of their neighbors’ borders may also be redrawn by force. An already massive humanitarian disaster seems certain to become worse.

Should ISIS succeed in establishing a permanent state-like entity in parts of Iraq and Syria, the disintegration of the region would accelerate, the US would lose its “global war on terror,” and world peace would be seriously threatened. But even without an ISIS terror state, the situation remains extremely unstable, because the Syrian civil war is proving to be highly contagious. In fact, “civil war” is a misnomer, because events there have long entailed a struggle between Saudi Arabia and Iran for regional predominance, powered by the age-old conflict between Islam’s Sunni majority and Shia minority.

The Kurds form another unstable component of the Ottoman legacy. Divided among several Middle Eastern countries – Iran, Iraq, Syria, and Turkey – the Kurds have been fighting for their own state for decades. Nonetheless, they have shown great restraint in northern Iraq since Saddam’s fall, contenting themselves with building up their autonomous province both economically and politically – to the point that it is independent in all but name, with a strong and experienced army in the Peshmerga militia.

The advance of ISIS and its capture of Mosul have now resolved, in one fell swoop, all territorial disputes between the central government and the Kurdish regional government in favor of the latter, particularly regarding the city of Kirkuk. Following the Iraqi army’s retreat, the Peshmerga promptly took over the city, giving the Kurdish north ample oil and gas reserves. Moreover, neighboring Iran and Turkey, as well as the US, will urgently need the Peshmerga’s support against ISIS. Thus, an unexpected window of opportunity has opened for the Kurds to achieve full independence, though their dependence on good relations with both Turkey and Iran for access to global markets will moderate their political ambitions.

Moreover, with its invasion of Iraq, the US opened the door to regional hegemony for Iran and initiated a dramatic shift in its own regional alliances, the long-term effects of which – including the current nuclear negotiations with the Iranian government – are now becoming apparent. Both sides are fighting the same jihadists, who are supported by America’s supposed allies, the Sunni-ruled Gulf states. Though the US and Iran remain opposed to official cooperation, the wheels have been set in motion, with direct bilateral talks becoming routine.

One key question for the future is whether Jordan, which plays a key function in the region’s equilibrium, will survive the geopolitical shifts unscathed. If it does not, the entire balance of power in the traditional Middle East conflict between Israel and the Palestinians could collapse. The consequences would most likely be far-reaching, if difficult to assess in advance.

For Europe, developments in the Middle East pose two major risks: returning jihadi fighters who threaten to bring the terror with them, and a spillover of their extremist ideas to parts of the Balkans. In the interest of their own security, the European Union and its member states will be compelled to pay much closer attention to southeastern Europe than they have until now.

Project-Syndicate     * Joschka Fischer was German Foreign Minister and Vice Chancellor from 1998-2005

Corn nears 6-month low on big U.S. supply outlook

Chicago corn resumed its fall on Wednesday to approach a near six-month low hit on Tuesday due to U.S. Department of Agriculture (USDA) forecasts of ample supplies along with almost ideal weather boosting U.S. crops.

Expectations China may end its corn stockpiling programme as it struggles with massive state reserves also weakened the market.

Soybeans ticked up in bargain hunting following Monday's sharp falls while wheat also held above Monday's lows.

Chicago Board Of Trade July corn fell 0.4 percent to $4.21-1/4 a bushel at 1103 GMT, after falling on Tuesday to $4.16, a contract low and the lowest spot price since Jan. 10.

New crop November soybeans rose 0.2 percent to $11.50-1/2 a bushel, after touching $11.32 a bushel on Tuesday, a 4-1/2 month low. September wheat was hardly changed, down 0.04 percent to $5.72-1/4 a bushel, after losing about 3.6 percent in the last two sessions.

"In corn, I think we are seeing weakness today as positioning is still being adjusted to reflect the new reality of more ample supplies in coming months as laid out by the USDA on Monday," said Ole Hansen, head of commodity strategy at Saxo Bank.

The USDA on Monday estimated U.S. 2014 soybean plantings at a record 84.8 million acres, exceeding market expectations. USDA estimates of June 1 soy and corn stocks also came in above average trade estimates.

The USDA's weekly crop progress report also showed U.S. corn condition ratings improved and soybean ratings were the highest in 20 years. Meanwhile, weather in the U.S. Midwest grain belt looks promising, with no sign of stressful heat as the corn crop nears pollination, a crucial growth phase that typically takes place in July.

"Grain and oilseed markets are in bearish tone after the USDA's forecast," said Kaname Gokon of brokerage Okato Shoji in Tokyo. "There is (the) possibility of further downside for new-crop contracts as importers are not buying at the current levels. December corn could go down $4.00 by next week and November soybeans may see $11.30 a bushel."

China is expected to scrap its corn stockpiling scheme as it battles to reduce mammoth state reserves which account for more than half of global stocks, possibly cutting lucrative U.S. corn exports to China already hit by Chinese rejections of corn cargoes containing unapproved genetically-modified grains.

But price drops also generated some purchase interest.

"In soybeans, November did manage to remain above the lows it reached in January this year in the sharp fall after the USDA numbers, which could be adding some confidence into the market," said Saxo Bank's Hansen. "We have seen soybean short positions increasing quite strongly in recent weeks so soybeans could be the sector where we would see some support arriving in the near term."

"Wheat did not really suffer from the same scale of bearish numbers...September wheat has also managed to hold above the lows it hit on Monday in the weakness following the USDA estimates so there is some bargain-hunting but with a fairly tight stop level as there could be moves to revisit the year's low in January."

China's Communist Party Ousts More Officials

         The WSJ reports, "China's Communist Party ousted more officials from its ranks who are suspected of corruption and appear to have ties to former political heavyweight Zhou Yongkang.

A former secretary to Mr. Zhou named Ji Wenlin and an official who worked in the country's public security bureau once headed by Mr. Zhou named Tan Hong were expelled from the party for various acts of suspected corruption including bribery, according to separate statements Wednesday from the party's Central Discipline Inspection Commission. Also dismissed from the party for suspected corruption was Yu Gang, a former deputy director for the party's Central Politics and Law Commission, which Mr. Zhou also headed.

The men couldn't be reached for comment. In China's justice system, party dismissal often leads to criminal prosecution and the party announcements said the cases will be handed to prosecutors. It isn't known if any of them have a lawyer.

Chinese President Xi Jinping launched a serious corruption crackdown after taking the helm of the party in late 2012. Just two days ago, the push claimed its most senior catch yet, as the party stripped membership from a top retired general, Xu Caihou.

During this period of 18 months or so, Chinese investigators appear to have particularly targeted Mr. Zhou's network, according to analysts. Before his retirement in 2012, Mr. Zhou, 71 years old, sat on the party's highest decision-making bodies and oversaw the country's vast policing system.

Now detained are numerous people once close to him, including government officials, business executives and some of his family members, according to official announcements and people familiar with the situation. None of those detained is known to have been put on trial.

No allegations have been made public against Mr. Zhou himself. He wasn't mentioned in Wednesday's announcements. He isn't reachable for comment.

The party hasn't alleged publicly criminal wrongdoing by an official of Mr. Zhou's rank since purges that followed the death of Mao Zedong nearly four decades ago.

As the former general was ousted on Monday, the party also penalized three people directly associated with Mr. Zhou by kicking them out of its ranks for alleged corruption, including Jiang Jiemin. Mr. Jiang had been Mr. Zhou's successor as chairman of state-owned China National Petroleum Corp., and he later briefly led a government commission overseeing Beijing's biggest state-owned companies".

U.S. private job gains in June largest in 1-1/2 years

U.S. private-sector hiring hit a 1-1/2-year high in June, reinforcing views that momentum was building to carry the economy through the rest of the year after a dismal start.

Wednesday's report from payrolls processor ADP added to other bullish data ranging from manufacturing to auto sales that has suggested the economy has bounced back smartly after a first-quarter slump.

"This is further proof that recent weaker growth numbers are not a true reflection of the U.S. economy," said Stuart Hoffman, chief economist at PNC Financial Services in Pittsburgh.

Private employers added 281,000 workers to payrolls last month, up from 179,000 in May, ADP said. June's increase, which topped economists' expectations for a gain of only 200,000 jobs, was the largest since November 2012.

Coming a day before the government's comprehensive employment report for June, the ADP data increased the likelihood of another month of strong nonfarm payrolls growth, economists said.

Most, however, maintained their forecasts for the government data, noting that the ADP report, which is jointly developed with Moody's Analytics, was not a reliable indicator of overall jobs growth.

Payrolls probably increased by 212,000 in June after rising by 217,000 the prior month, according to a Reuters poll of economists. The Labor Department is schedule to release its jobs tally at 8:30 a.m. EDT (1230 GMT) on Thursday.

In a separate report, the National Federation of Independent Businesses said small business hiring increased in June for a ninth straight month, the longest string of gains since 2006.

"The ADP data, along with many other labor market indicators, suggest that firms have not pulled back on payrolls despite the weak growth during the first half of the year," said Daniel Silver, an economist at JPMorgan in New York.

Gross domestic product contracted at a 2.9 percent annual pace in the first quarter. Growth in the second quarter is forecast at around a 3.5 percent rate.

That better outlook was underscored by data on Tuesday showing sales of automobiles hit their highest level in almost eight years in June and factories expanded at a steady clip.

Even housing, which has struggled following a run-up in mortgage rates last year, is showing signs of life. But higher borrowing costs remain a constraint, with applications for loans to buy homes falling for a third straight week last week.

With the economy's fortunes improving, some economists said the U.S. Federal Reserve's ultra easy monetary policy was no longer warranted. The central bank is reducing the amount of money it is injecting into the economy, but has yet to signal an intention to raise interest rates anytime soon.

"This is a further warning sign that the Fed is falling behind in its guidance on the future path for interest rates," said John Ryding, chief economist at RDQ Economics in New York.

The Fed has held benchmark overnight rates near zero since late-2008.

U.S. stocks were flat after the data on Wednesday, while bond yields rose, with the 10-year Treasury note hitting 2.61 percent. The dollar firmed against a basket of currencies.

While a separate Commerce Department report showed orders received by factories fell in May on a sharp drop in bookings for defense goods, inventories recorded their biggest increase since October 2011, a boost to second-quarter growth.

Unfilled orders at factories also rose, as did shipments, brightening the outlook for manufacturing.

A slow pace of inventory accumulation was one of the main drags on growth in the first quarter.

Last month, job gains in the private sector were broad-based. Construction payrolls increased by 36,000, the biggest gain since February 2006. Manufacturing added 12,000 jobs.

Professional business services employers hired 77,000 workers last month, the most since November 2012.

Source: Reuters

How merger momentum could explode past $4 trln

The merger boom could really explode. With about $1.8 trillion of M&A so far this year, 2014 is shaping up to be the biggest year since 2007. Looked at through the prism of history, though, it may only be the start.

Standard measures of M&A activity can be misleading. For one thing, they tend to ignore inflation. A dollar – or several billion of them – used to buy far more. The value of assets fluctuates, meaning in some years companies are far cheaper than others. Globalisation also plays a big part these days. There were no merger surges in the USSR.

One rough-and-ready way to reconcile it all is to set volume against stock market capitalisation. Over the last three decades, annual M&A has on average equated to 7.3 percent of Datastream's total world market index, according to Breakingviews calculations. This ratio cycles from 4 percent to 5 percent at troughs like the one in 1992, to highs of 12 percent to 14 percent, as in 1999.

With $3.1 trillion of deals over the last four quarters, according to Thomson Reuters data, and world markets worth about $55.4 trillion, the current ratio of M&A to market value is 5.6 percent. Suppose equities increase by another 10 percent by the end of next year to $60.9 trillion, and merger volume grows to its long-term proportional average. That would imply $4.5 trillion of acquisitions in 2015.

It may be an overly optimistic figure, but there are plenty of reasons to think M&A momentum will keep rolling. Cheap debt, plentiful cash, investors rewarding acquirers, improving corporate confidence and economic recovery are all conspiring with the simple fact that deals usually beget more deals.

What may be great for bankers, though, won't necessarily benefit shareholders. The rush by U.S. buyers to find overseas targets merely to cut their tax bills, a trend that has contributed significantly to this year's activity, could lead to many unhappy partnerships over the long run. What's more, deal valuations are moving up, suggesting hubris is already setting in. So, yes, expect the surge in M&A to continue. And with so much activity so quickly, value destruction will rise along with it.
- Global mergers and acquisitions are being announced at the fastest pace since 2007, with about $1.8 trillion of deals unveiled in the year to June 30, according to preliminary data from Thomson Reuters.

- The volume represents a 73 percent increase from a year ago. In the busiest sectors – healthcare and media and entertainment, deal volume roughly tripled, to $317 billion and $221 billion, respectively.

- Goldman Sachs was the busiest adviser, working on $620 billion of deals.

Source: Reuters

U.S. crude inventories decline more than expected -EIA

U.S. crude stocks fell last week as refineries hiked output, while gasoline stocks decreased and distillate inventories rose, data from the Energy Information Administration showed on Wednesday.

Crude inventories fell by 3.2 million barrels, compared with analysts' expectations for an decrease of 2.2 million barrels.

Crude stocks at the Cushing, Oklahoma, delivery hub fell by 1.36 million barrels, EIA said.

Refinery crude runs rose by 546,000 barrels per day, EIA data showed.

Gasoline stocks fell by 1.2 million barrels, compared with analysts' expectations in a Reuters poll for a 400,000-barrel gain.

Distillate stockpiles , which include diesel and heating oil, rose by 1.0 million barrels, versus expectations for a 800,000-barrel increase, the EIA data showed.

U.S. crude imports fell last week by 76,000 barrels per day.

Source: Reuters

Telefonica agreed to buy E-Plus, currently Germany's No 3 operator

Source: AP