Gold extends winning streak to 6th week on safe-haven demand

 Gold retained sharp overnight gains to trade near a 16-week high on Friday and was poised to post its sixth weekly rise in a row, as troubles at a Portuguese bank hammered equities and stoked safe-haven demand for bullion.


FUNDAMENTALS

* Spot gold inched up 0.1 percent to $1,336.36 an ounce by 0028 GMT, after closing up 0.7 percent on Thursday, when it rose to a peak of $1,345 - the metal's highest since March 19.
* Gold has gained over 1 percent this week. The sixth weekly gain is gold's longest winning streak since Feb-March when it had a similar run.
* European and U.S. stock markets fell, and bond yields of Europe's southern nations rose on Thursday as investor fears over financial troubles at the family-owned holding companies behind Banco Espirito Santo spilled across markets and borders.
* Meanwhile, India surprised bullion markets by keeping the import duty on gold and silver unchanged at 10 percent in its fiscal budget, a move likely to limit overseas purchases by the second-biggest bullion consumer and further encourage smuggling. 

* SPDR Gold Trust , the world's largest gold-backed exchange-traded fund, said its holdings fell 0.23 tonnes to 800.05 tonnes on Thursday.
* Among other precious metals, platinum and palladium were both headed for their fourth straight weekly gain, while silver was on track for a sixth weekly gain tracking gold.
* For the top stories on metals and other news, click
MARKET NEWS

* Stocks slumped worldwide on Thursday and investors flocked to safe-haven assets such as government bonds, Japanese yen and gold on fears problems at Portugal's biggest listed bank could herald a wider slump for riskier assets. 
Source: Reuters

Copper eyes 4th week of gains on tighter supply

SINGAPORE, July 11 (Reuters) - London copper steadied on Friday and was on track for a fourth consecutive week of gains on Friday with tightening global supplies and economic optimism driving prices higher.


FUNDAMENTALS

* Three-month copper on the London Metal Exchange eased 0.1 percent to $7,155 a tonne by 0120 GMT. Copper on Tuesday hit its highest in 4-1/2 months at $7,212 and was up marginally for the week, its fourth weekly gain, which would be its longest winning streak since December 2012.
* The most-traded September copper contract on the Shanghai Futures Exchange gained 0.3 percent to 50,790 yuan
($8,200) a tonne.

* Copper inventory levels in LME-registered warehouses, at 158,100 tonnes, are at their lowest in nearly six years, having steadily fallen in the last 12 months. 
* Signs of global economic recovery have gathered pace following last week's strong U.S. jobs data and factory numbers from China that reinforced expectations of a pickup in demand for industrial metals.
* While Thursday's data in China, the world's biggest copper consumer, showed its trade performance improved in June, it missed market forecasts and suggested that Beijing will have to unveil more stimulus measures to stabilise the economy.
* China's copper imports fell in June to the lowest since April 2013 as banks reduced lending for metals imports following a probe into alleged fraudulent metals financing at Qingdao port. 

* Standard Bank Plc said it has a total exposure related to China's Qingdao port of about $170 million worth of aluminium, and has started legal proceedings in Shandong province to protect its position.
* Societe Generale is merging its open outcry trading team on the London Metal Exchange with its unit Newedge, cutting the number of LME "ring-dealing" members to 10.
MARKETS NEWS

* Asian share markets slipped on Friday as troubles at a small Portuguese bank managed to wrong foot investors already made anxious by the U.S. earnings season and a spate of disappointing economic data globally.

OPEC's oil market share to shrink in 2015, despite growing demand

OPEC expects its share of the world oil market to shrink in 2015 for a third year running, due in part to the U.S. shale oil boom, giving the exporter group little comfort from an acceleration in global demand.

Making its first 2015 forecast in a monthly report, the Organization of the Petroleum Exporting Countries said demand for its oil next year would average 29.37 million barrels per day (bpd), down 310,000 bpd from 2014.

The report by the 12-member OPEC points to ample supplies next year, especially if there is further progress in resolving outages in OPEC countries Libya, Iraq and Iran. Those production problems have curbed supply this year and helped support prices above $100 a barrel.

"Even if next year's world economic growth turns out to be better than expected and crude oil demand outperforms expectations, OPEC will have sufficient supply to provide to the market," the report from OPEC's Vienna headquarters said.

The report is also a further illustration that technology for extracting oil and gas from shale is, for now, reducing dependence on OPEC.

OPEC also forecast a recovery in demand next year as economic growth gathers pace, predicting that world oil use will expand by 1.21 million bpd, up from this year's 1.13 million bpd increase.

But non-OPEC supply, the source of two in every three barrels, is expected to increase next year by 1.31 million bpd, more than demand, with the United States leading the way.

OPEC expects U.S. production to average 13.12 million bpd in 2015, up 880,000 bpd from 2014 and the highest increase of all non-OPEC countries. Still, it warned that a drop in oil prices -

among other risks - could dampen the expansion.

"Despite the anticipated strong growth from tight oil developments in 2015, a certain level of risk remains, mainly related to the current oil price, infrastructure and environmental issues," OPEC said.

OPEC's report also indicates that the demand for its crude next year will fall further below its output target of 30 million bpd. At a meeting in June, OPEC agreed to retain the 30 million bpd target for the second half of 2014.

Protests and unrest in Libya, Western sanctions on Iran and fighting in Iraq have taken their toll on OPEC production in recent months, keeping output sometimes below the target.

OPEC pumped 29.70 million bpd in June, down 79,000 bpd from May, according to secondary sources cited by the report. Supply could increase in July should Libya's production sustain a recent recovery.

In addition to rising non-OPEC supply, OPEC also said its own members would boost supply of natural gas liquids and non-conventional oil by 200,000 bpd in 2015, further trimming the requirement for OPEC crude.

OPEC's forecast of next year's growth in world oil demand is lower than that of the U.S. government's Energy Information Administration, which on Tuesday predicted consumption would increase by 1.46 million bpd. 

Another closely watched report on global oil supply and demand, from the International Energy Agency which advises industrialised countries, is due on Friday.

Shell leaves its peers behind on big gas-to-liquids plants

 Shell will press on with new plants to convert gas to liquid fuels, its investment and technical edge leaving its peers behind in the process once seen as a radical game changer.

The company has seen costs overrun at its flagship Qatar plant, cancelled a U.S. project and is relying on a favourable link between prices for feedstock natural gas and oil - factors which have jangled the nerves of some investors in Royal Dutch Shell 

Investors are also wary of the massive upfront costs companies face in building the gas-to-liquids (GTL) plants. Only Shell and South Africa's Sasol have so far made GTL plants work on a large scale.

"Shell is so far ahead technically," said Ed Osterwald, who has advised companies and governments on GTL and is a partner at consultants Competition Economists Group. "It is hard to see how another large company is going to replicate that."

Recent indications on GTL's prospects have been mixed. Costs overran at Shell's $19 billion plant in Qatar. In December it cancelled a proposed plant in Louisiana as costs rose.
But last week, Sasol said it will carry out a feasibility study to build a large site in Mozambique with Eni of Italy. Shell is also studying the feasibility of building a plant there.

The plants are based on a process developed in the 1920s by two German scientists, Franz Fischer and Hans Tropsch. Shell has developed the process further and has more than 3,500 patents. Sasol also has its own GTL technology.

Only a handful of projects exist. Shell operates Pearl in Qatar, the world's largest, and has a smaller site in Malaysia. Sasol has a plant in Qatar and plans to build more, including in the United States. A Chevron project in Nigeria using Sasol technology is starting this year.

A decade or more ago, the prospect for GTL looked brighter.

"Gas into oil may revolutionise energy" read a Reuters headline from 1998. Exxon Mobil in the early 2000s planned a similar plant to Pearl, but in 2007 cancelled it.

Shell says that the cancellation of its own U.S. project does not mean it has given up on expanding.

"We continue our investment into technology development and product development to increase the value of future GTL projects," said Guy de Kort, a Shell vice president, at a conference in London.

"We are pursuing other opportunities as well. But the economics have to be convincing enough to put our money there."


ARBITRAGE INVESTMENT

Some Shell investors are less enthusiastic than executives about large GTL projects. Costs at Pearl soared to $18-$19 billion from $5 billion initially. Shell's shares rose after it cancelled the U.S. project on Dec. 5 last year.

"Returns from gas-to-liquids projects are not very predictable," said Ivor Pether of Royal London Asset Management, which holds Shell shares.

"They depend on the spread being right between volatile gas input costs and the output price of the product, such as diesel

– rather like an arbitrage investment."

"When Shell cancelled that $20 billion Gulf Coast GTL project at the end of last year, it was probably the first sign things were changing at the company, with greater focus on capital discipline. The shares responded well on that day and pretty much started outperforming from that point."

Shell is happy with how Pearl is performing. Even executives at rival companies say the investment turned out well as oil prices have risen since 2006, much more than gas prices.

But even with a large source of gas at its disposal and assuming that its energy price forecasting team comes up with favourable numbers, a potential plant builder still needs to take a brave punt.

"You have to believe that that arbitrage gap is going to sustain itself," said Osterwald. "It is very expensive and there are a lot of risks, but in the right way it can be very successful."

Smaller projects could be a way forward for the technology that companies including UK-listed Velocys are looking to exploit.

Velocys says its GTL technology works at a smaller scale of 1,500–15,000 bpd and estimates there is a large market to convert gas in remote locations and at smaller fields.

"There is no small-scale one yet that's commercial," said Neville Hargreaves, business development manager at Velocys.

"But it's coming."
Source: Reuters

Falling gas prices threaten LNG export projects

A sharp fall in European and Asian gas prices this year will put liquefied natural gas (LNG) export projects worldwide under heavy cost pressure, and even kill some off, as expected returns on investments have to be revised down along with prices.

Benchmark British gas prices for delivery next month have almost halved this year as healthy supplies have been met by low demand following a mild winter and because overall gas use is dropping due to improving energy efficiency, rising competing fuels like renewables and low population growth. [ID:nL6N0PI23A]

Asian spot prices have also come off sharply this year, shedding over 40 percent in value as demand growth slowed and new supplies in the Pacific region became available, although prices remain almost twice as high as in Britain and around three times as expensive as in North America.

These price drops came despite ongoing gas disruption from Russia, the world's biggest gas exporter, to Europe via Ukraine, and as Japan still has its nuclear power plant fleet switched off following the Fukushima reactor meltdown in 2011.

If gas prices remain low, analysts say many of the large and costly planned liquefied natural gas (LNG) export projects around the world, including in North America and East Africa, will face trouble as initially budgeted returns on investment have to be revised downward.

"Gas projects are extremely price-sensitive because the margins are so thin ... and only a small fraction of them (large LNG export projects) will get built," Royal Dutch Shell's director of projects and technology, Matthias Bichsel, said in June. [ID:nL5N0OQ1TB]

The Asian and European price drops also mean their premium over U.S. gas prices has fallen sharply, and if the trend lasts, could spell difficulty for some U.S. LNG export projects in selling their gas to the world profitably.

An unconventional gas production boom, including from underground shale, has led to a sharp fall in U.S. gas prices since 2008 to $3 to $5 per million British thermal units

(mmBtu), equivalent to 17.5 to 30 pence per therm in British market terms.

French Bank Societe Generale said this week in a research note that it expected U.S. gas prices to range between $4 and $4.50 per mmBtu between 2014 and 2016.

At such cost levels, industry data show that U.S. LNG exporters would need a European price of 53 pence per therm

($9/mmBtu) to sell there at profit, and $10.65/ mmBtu for Asia.

With British prices down from over 70 pence a therm in January to around 36.50 pence ($6.25/mmBtu) in early July, Europe is now well out of the money for U.S. supplies, and with Asian prices down to $11 per mmBtu, this region is also on the brink of looking uncompetitive.

Increasing the price pressure is that analysts say U.S. prices will rise while Asian and European ones will drop if the United States begins LNG exports from late next year as planned as gas sucked out of America is added to supplies overseas.

"We're reviewing our previous cost and return projections and will also have to reduce production costs in order to compete in a lower priced gas environment," one source with a planned U.S. LNG export project said.

If, as planned, Japan restarts some of its nuclear power plants and the Ukraine crisis fades in Europe, Asian and European prices could fall further still.

Behind Europe's falling gas prices lies a slow but steady slide in overall demand.

The International Energy Agency (IEA) estimates that European gas demand dropped by over 10 percent between 2008 and 2013, a trend that further accelerated this year following an unusually mild winter and spring, improving energy efficiency, as well as rising renewable and coal capacities eating into the share of gas for power generation.

"Electricity generation from gas is declining as gas plants are being squeezed out of the mix. The power sector, the former key driver for additional demand, is the possible key driver for demand decline in the 2010s and beyond," the Oxford Institute for Energy Studies said in a research report published in June.

The fall in gas use has so far outstripped dropping domestic North Sea production.

With pipeline and LNG imports also steady or ticking up in 2014, gas markets have become oversupplied, pulling down prices.


WILL CHEAP GAS LAST?

Although the overall price outlook for gas is bearish as the global market passes its peak tightness this year, there are still factors that could push prices up again.

Gas markets are highly weather sensitive, as seen in price spikes triggered by cold snaps in the United States last winter and in Britain the previous year. A long and cold European winter season 2014/2015 could push prices up over 50 percent and back towards levels seen last year, traders say.

Gas markets are also prone to political instability as seen in gas-rich North Africa since the outbreak of unrest there in 2011 or in the current Ukraine crisis that threatens to disrupt supplies to parts of Europe. 


And, there is Europe's declining North Sea gas reserves.

Britain's gas production alone has fallen from 45.2 billion cubic metres (bcm) in 2011 to 36.5 bcm last year, and the decline is expected to continue steadily even if the country starts producing gas from shale.
Source: Reuters

Global oil exploration nears $1 trillion - where are the finds?

 Two years ago Total's chief Christophe de Margerie launched a "high risk, high reward" oil exploration strategy, betting he could hit a bonanza, even though his rivals had failed to make big discoveries.

But Total risks joining the industry trend of making only smaller and fewer finds, despite global investments in oil exploration heading to a record $1 trillion by 2017.

This week, Margerie told Reuters he gives himself until the year-end to find a major deposit or cut the exploration budget next year following several disappointing drilling campaigns.
Top players are struggling to find enough conventional oil. Majors are caught between growing pressure from investors to cut spending and boost profits and the increasingly costly need to replace declining onshore and offshore reserves.

"Over the last 10 years the rate of return from exploration has diminished with time," said Andrew Lodge, exploration director at London-listed explorer Premier Oil.

"In the heyday of 2001-2002 the average rate of return for the industry was 20 percent ... that dropped last year to around 10 percent," he said.

Disappointing exploration campaigns no longer make such big headlines as they were 10 years ago amid the "peak oil" debate.

That theory of oil as a diminishing resource has been transformed by the U.S. shale oil revolution. Speedy growth from North American unconventional oil reserves has helped stabilise oil prices, despite major supply outages.

As a long-standing U.S. ban on crude oil exports remains in place, however, the industry still hugely relies on conventional mega-projects, such as those off the coast of Angola or Brazil, which progress along generally predictable time frames and produce stable volumes for years.

The shale oil industry is more complicated and is still in its infancy, which makes it incredibly difficult to anticipate new oil coming onto the market. [ID:nL2N0PJ2EO]


TRILLION DOLLARS

New conventional discoveries in recent years have disappointed in size and only a handful, such as Statoil's Johan Sverdrop oilfield in the North Sea, have emulated the mega fields discovered more than 50 years.

"Today we consume 33 billion barrels of oil per year and are discovering 10-20 billion barrels at most. It appears that the biggest single oil discovery in 2013 was less than 1 billion barrels in size," asset management firm Investec said in a report.

Despite a tight capital diet, oil companies are set to spend a record $1 trillion to explore for new reserves by 2017, according to Barclays.

Exploration and production spending has risen four-fold since 2000 to around $700 billion because of a rise in material and services prices, which in turn were driven to a large extent by a steep increase in global oil prices and inflation rates.

In 2014, ExxonMobil will spend the most on E&P among the oil majors at $35.3 billion dollars, followed by Chevron at $34.6 billion. PetroChina has the largest E&P budget for 2014 at $39.6 billion, according to Barclays data.

"Majors have increased exploration budget by 3 to 5 times in recent years but they have been very ineffective," said Investec's Charles Whall. "The oil companies are a little complacent".

Oil discoveries peaked in the 1960s when around 400,000 billion barrels were discovered.

In a measure of the success of drilling project, the number of new oilfield developments is set to drop below 50 per year in 2014 and 2015, compared with an average of 75 per year over the past decade, according to Nicholas Green, analyst at London-based Bernstein Research.

"This represents the lowest level of activity since 1999, lower even than the oil price crash of 2008-09," he said.

The declining rate of finds is now discouraging investment in certain areas, with drilling in the North Sea set to decline the most over the next two years. Southeast Asia is likely to be the only region to see increased activity, according to Green.

The complexity of "frontier exploration" such as the Arctic and the pre-salt deep waters of Brazil and West Africa has cut returns on investments.

Some hope the answer to poor exploration results can be found in increased recovery rates from mature conventional fields.

Oil recovery averaged around 35 percent for decades but technological advances such as computer geological modelling and the use of new chemicals have increased the recovery to over 50 percent, according to Matthias Bichsel, Shell director of projects and technology.

"I believe in further breakthroughs in enhanced oil recovery. That's what we will see - injecting chemicals to simply get more oil out of the ground," Bichsel told Reuters.

"The best way is to make the most out of what you have."
Source: Reuters

Japanese firms near crisis point as labour shortage deepens

Japan's labour shortage is nearing crisis in some key industries as it spreads from construction to services, curbing companies' operations, pushing up wages and potentially crimping a tentative recovery in the world's third-largest economy.

Airlines, retailers, truckers and restaurant chains are being forced to rethink expansion plans and, in extreme cases, shut up shop because they cannot fill jobs at any wage.

Peach Aviation Ltd, a joint venture backed by Japan's largest airline, ANA Holdings <9202.T>, said last month it would cancel more than 2,000 flights this year, 16 percent of its planned total. Budget carriers Jetstar Japan and Vanilla Air have also cancelled hundreds of flights this summer, a government report on pilot shortages showed.

"There aren't enough captains and training one takes time and money," said Peach Aviation spokesman Hironori Sakagami.

"We wanted to increase the number of flights, but we had to delay that."

Peach's predicament underscores a broader problem facing the world's fastest-aging country. Jolted out of two decades of deflation by Prime Minister Shinzo Abe's reforms, many Japanese companies are struggling to secure workers due to minimal immigration, inflexible hiring laws and a working age population that is expected to shrink by 13 million people by 2030.

The problems facing companies in their bricks-and-mortar expansion come just as doubts arise about the prospect for business investment to drive the recovery. Machinery orders, a key gauge of plans for manufacturers' capital spending suffered a record plunge in May, data showed on Thursday, prompting the government to say the trend of rising orders was stalling. 

"There's a high risk of labour shortages causing a growth bottleneck particularly if the labour market remains rigid," said Yasuo Yamamoto, senior economist at Mizuho Research Institute. "More efforts are needed to enhance liquidity in the labour market to shift more workers to growth sectors while increasing the number of workers, including immigrants."
Source: Reuters

Asian shares track Wall St lower, yen gains

 Asian shares recouped early losses on Friday as sentiment in the region proved resilient to Portuguese bank concerns amid signs offshore funds were returning to emerging world assets.

MSCI's broadest index of Asia-Pacific shares outside Japan  recovered to be a fraction firmer. Indices in Australia <.AXJO>, Singapore <.FTSTI> and China <.SSEC> were all higher, while Japan's Nikkei <.N225> pared its losses to be off just 0.26 percent.

The yen also surrendered some of its safe-haven gains as analysts emphasised that the woes of one Portuguese bank were no threat to the country's sovereign rating.

Rather the news served as an excuse to book profits on what has been a long rally in European stocks and bonds.

Indeed, there were signs investors were taking money out of peripheral euro zone debt and seeking higher returns in the emerging world. It was notable that MSCI's index of emerging market stocks actually rose  on Thursday having hit a 17-month peak earlier in the week.

European stocks had been buffeted overnight as trading in Banco Espirito Santo was halted after a 19 percent drop. The bank's largest shareholder suspended trading in its own shares and bonds due to "material difficulties" at its own largest shareholder.

Late Thursday night, the bank said losses on loans to the troubled business empire of its founding family will not put it at risk of running short of capital.
The damage was amplified by data showing unsettlingly weak readings for May industrial production in France and Italy. These followed equally disappointing numbers from Germany and the UK, which has led many analysts to cut their estimates of economic growth for the second quarter.

Portugal's market <.PSI20> had fallen 4.2 percent and Italy's FTSE MIB <.FTMIB> 1.9 percent on Thursday.


A YEN FOR SAFETY

While the fate of a relatively minor bank in Europe would not normally have had much effect on Wall Street, it was enough to make investors reconsider the market's high valuations as the earnings season gets into full swing.

The S&P 500 index <.SPX> fell 0.41 percent, while the Dow <.DJI> eased 0.42 percent and the Nasdaq <.IXIC> 0.52 percent.

The S&P 500 financial sector index <.SPSY> fell 0.5 percent and Wells Fargo & Co , which reports earnings later Friday, lost 0.7 percent.

With stocks off the boil, Treasuries picked up the usual safe-haven bid for shorter-term debt which is prized for its deep liquidity. Yields on two-year notes fell over 4 basis points to 0.4561 percent, a marked reversal from a high of 0.5360 percent hit just on Wednesday.

German debt played much the same role in Europe, where yields on 10-year bunds ended at a 14-month trough of 1.20 percent . Bonds in the euro zone periphery were not so lucky, with yields on Portuguese, Spanish and Italian bonds all rising sharply.

The itch for safety benefited the Japanese yen which climbed a full yen to 137.76 per euro . The dollar initially dropped as far as 101.04 yen but then slowly made it way back to 101.30.

The higher-yielding Australian and New Zealand dollars also remained well supported, suggesting there was no widespread retreat from risky assets.

In commodities, gold was up at $1,337.95 having touched a 3-1/2-month top of $1,345.00.

Oil prices steadied after a run of losses. Brent was up 6 cents at $108.73 a barrel, while U.S. crude eased 5 cents to $102.88.

Tensions in the Middle East also continued to simmer with Israeli officials seeming to hint at a possible assault on Gaza by ground forces.
Source: Reuters

Markets Tumble on Portuguese Bank Concerns

         The WSJ reports,"worries over the financial health of a major Portuguese lender spooked global markets Thursday, drubbing shares in southern Europe and sending U.S. stocks on an early swoon.

The broad, sharp market moves were reminiscent of the euro zone's debt crisis in 2011: A shock in a small country spread across the continent, pulling down every major stock index in Europe, trickling over into Wall Street and sending investors scurrying for the perceived safety of gold and U.S. and German government bonds. The 10-year German Bund traded at its strongest level since May 2013.

Portugal's benchmark index led the declines, falling 4.2%. Exchanges in Spain and Italy were each off close to 2%, and the broad Stoxx Europe 600 fell 1.1%. The Dow Jones Industrial Average closed down 70.54 points, or 0.4%, at 16915.07, after falling as much as 1.1% earlier. Amid the market turmoil, some southern European companies postponed planned stock and bond offerings, and investors were left wondering whether the problems were confined to Portugal or presaged a wider reassessment of Europe's recovering but still fragile banking system.

Friday morning in Asia, Japan shares fell 0.3%, Korea shares were down 0.6% and Australia shares gained 0.2%.

It has been more than a year since fears about the health of a European bank rattled markets, and investors, bankers and regulators have been growing increasingly confident about the continent's financial system. Regulators have hoped the banking industry's improving health would shine through on so-called stress tests they are conducting on more than 120 large banks.

Instead, the rapid descent of Portugal's Banco Espírito Santo SA, and the collateral damage in other European markets, suggests conditions remain precarious.

In a statement Thursday, the International Monetary Fund, which along with the European Union bailed out Portugal in 2011, said Portuguese banks had weathered the euro-zone crisis well but that "pockets of vulnerability remain."

At the epicenter is Banco Espírito Santo. Shares in the troubled Portuguese lender have been under pressure since May, when the bank disclosed that an audit ordered by Bank of Portugal into Espírito Santo International SA, the conglomerate that indirectly holds a stake in the bank, had found Espírito Santo International was in a "serious financial condition" and had uncovered accounting irregularities. But the declines mounted drastically Thursday after investors learned Espírito Santo International had delayed coupon payments relating to some short-term debt securities.

Switzerland-based Banque Privee Espírito Santo SA, which is owned by Espírito Santo Financial Group, said in an emailed statement Wednesday that Espírito Santo International has delayed the repayment of short-term debt sold to some of its clients. It said the repayment is the sole responsibility of the conglomerate. The conglomerate declined to offer a separate comment.

The bank's stock dropped more than 17% before trading in its shares was suspended. Trading in Banco Espirito Santo's controlling shareholder, Espirito Santo Financial Group SA, listed in Luxembourg and Lisbon, was also suspended earlier Thursday. The Portuguese markets regulator banned short selling, or betting against, Banco Espirito Santo shares in Friday's session.

U.S. stocks opened sharply lower but gradually pared losses as investors digested the news. Despite its declines, the Dow is just 0.9% off its record, reached July 3 after a stronger-than-expected reading on the U.S. job market. In late-afternoon trading, the 10-year Treasury note's yield fell to 2.531%, down slightly from Wednesday's 2.547%. When bond prices rise, yields fall.

Espírito Santo International had been relying heavily on selling debt to the funds marketed by its own banks, according to financial documents reviewed by the Journal last year. Over a 21-month period, it cumulatively sold more than €6 billion ($8.2 billion) in short-term debt to one of its own investment funds.

While the maneuver was legal, law and accounting professors said last year that the practice exposed investors to heightened risks and raised flags about the financial health of the conglomerate. Last November, Portugal's market regulator moved to limit the amount any Portuguese fund can invest in an affiliated company.

Espírito Santo International said in December it would replace the financing coming from the funds, mainly through the issuance of commercial debt. That debt was sold to private-banking customers and Portugal Telecom SGPS SA, among others. Portugal Telecom disclosed last month that it had €897 million of debt from a unit of Espírito Santo International. Banco Espírito Santo is a large Portugal Telecom shareholder.

The amount of Espírito Santo International's outstanding debt is unknown, because the company is privately owned.

Banco Espírito Santo said late Thursday that exposure to Espírito Santo International entities, including Espírito Santo Financial Group, totaled €1.2 billion as of June 30, mostly in loans. Its retail clients held €853 million in debt from the entities, while institutional clients held €2 billion.

The bank's "executive committee believes that the potential losses resulting from the exposure to [Espírito Santo entities] do not compromise the compliance with the regulatory capital requirements," it said in a statement.

Espírito Santo Financial Group earlier said it was forced to set aside €700 million in March to cover any losses retail clients of Banco Espírito Santo may face related to Espírito Santo International debt.

A Banco Espírito Santo spokesman declined to say Wednesday whether it has tapped that money to repay its customers. He said the bank's clients are being repaid in full and without delays.

Amid the bank's stock decline, lenders around Europe took a battering Thursday. Banks in the Iberian Peninsula suffered the most, but shares in financial institutions in Germany, France and the U.K. all dropped markedly, too.

Banco Popular Español stock closed the session down 2%, but earlier in the day had traded 5% weaker. The Spanish group also postponed a bond issue, citing the adverse market conditions. Riccardo Barbieri Hermitte, the chief European economist at Mizuho International PLC in London, said Thursday's selloff "shows that assumptions that the market was making were incorrect."

"If a banking system has been recapitalized, it doesn't necessarily mean that it doesn't face problems," he said".

GLOBAL MARKETS-Asian shares track Wall St lower, yen gains

Asian share markets slipped on Friday as troubles at a small Portuguese bank managed to wrongfoot investors already made anxious by the U.S. earnings season and a spate of disappointing economic data globally.

Tensions in the Middle East also continued to simmer with Israeli officials seeming to hint at a possible assault on Gaza by ground forces.
As a result, yields on safe-haven U.S. and German debt fell, the yen scaled a five-month peak against the euro and gold hit a three-and-a-half month high.

Japan's Nikkei <.N225> fell 0.7 percent, while Australia eased 0.4 percent <.AXJO>. MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> dipped 0.3 percent.

Analysts emphasised that the woes of one Portuguese bank were no threat to the sovereign's rating and rather the news served as an excuse to book profits on what has been a long rally in European stocks and bonds.

Indeed, there were signs investors were taking money out of peripheral euro zone debt and seeking higher returns in the emerging world. It was notable that MSCI's index of emerging market stocks actually rose <.MSCIEF> on Thursday having hit a 17-month peak earlier in the week.

In contrast, European stocks were buffeted as trading in Banco Espirito Santo was halted after a 19 percent drop. The bank's largest shareholder suspended trading in its own shares and bonds due to "material difficulties" at its own largest shareholder. [ID:nL6N0PL27C]

The damage was all the greater as data showed unsettlingly weak readings for May industrial production in France and Italy. These followed equally disappointing numbers from Germany and the UK, which has led many analysts to cut their estimates of economic growth for the second quarter.

Portugal's market <.PSI20> fell 4.2 percent and Italy's FTSE MIB <.FTMIB> 1.9 percent, pulling down the European index <.FTEU3> by 0.78 percent.

While the fate of a relatively minor bank in Europe would not normally have had much affect on Wall Street, it was enough to make investors reconsider the market's high valuations as the earnings season gets into full swing.

The S&P 500 index <.SPX> fell 0.41 percent, while the Dow <.DJI> eased 0.42 percent and the Nasdaq <.IXIC> 0.52 percent.

The S&P 500 financial sector index <.SPSY> fell 0.5 percent and Wells Fargo & Co , which reports earnings later Friday, lost 0.7 percent.

With stocks off the boil, Treasuries picked up the usual safe-haven bid for shorter-term debt which is prized for its deep liquidity. Yields on two-year notes fell over 4 basis points to 0.4561 percent, a marked reversal from a high of 0.5360 percent hit just on Wednesday.

German debt played much the same role in Europe, where yields on 10-year bund yields ended at a 14-month trough of 1.20 percent . Bonds in the euro zone periphery were not so lucky, with yields on Portuguese, Spanish and Italian paper all rising sharply.

The itch for safety benefited the Japanese yen which climbed a full yen to 137.76 per euro . The dollar dipped to 101.26 yen even as it gained on the euro to $1.3599 .

Yet the higher-yielding Australian and New Zealand dollars remained well supported, again suggesting there was no widespread retreat from risky assets.

In commodities, gold was up at $1,336.01 having touched a 3-1/2 month top of $1,345.00. [ID:nL4N0PL2NH]

Oil prices fell anew after a brief rally on Thursday. Brent was off 13 cents at $108.54 a barrel, while U.S. crude eased 16 cents to $102.77.

WSJ: Alibaba Is Set to Start on Path to IPO

"Chinese e-commerce company Alibaba Group Holding Ltd. plans to launch its initial-public-offering process as soon as the end of the month, people familiar with the matter said.

The firm, which could raise more than $20 billion and rank as one of the largest IPOs ever, shared a timetable with some current investors through an email, the people said. The email marks an official acknowledgment of the timing plans, until now the subject of wide speculation.

The communication also warned that timing still depends on market conditions.

Including a "roadshow," which pitches the deal to investors, the IPO process for a deal of this size typically takes about two weeks. That means if all goes smoothly, shares would be sold and begin trading by mid-August on the New York Stock Exchange. The mid-August timing would help ensure the deal gets done before bankers and investors head out of town for late summer vacations.

Alibaba looks poised to price into an IPO market that mostly has regained its footing after a stumble in the spring. The U.S. has produced the most IPOs, raising the most money, by this point in any year since 2000, according to data provider Dealogic.

A number of other Chinese technology companies have seen their shares rise following IPOs in the U.S. this year. JD.com Inc.,  an online Chinese retailer, has seen its stock climb 46% since its debut in May, and Weibo Corp. , an online-messaging service akin to Twitter, is up 13% since its April offering.

Alibaba connects buyers and sellers of various goods and services across its websites and mobile apps. It is expanding fast and highly profitable, generating $3.7 billion in net income against total revenue of $8.4 billion in the fiscal year ended March 31.

The IPO timing was mentioned in a message to current investors asking them to agree to a standard "lockup" period, which would block them from selling shares for 180 days after the IPO, the people said".

U.S. Companies starting to use yuan in imports from China

   The WSJ reports,"american companies are conducting a record amount of business in Chinese yuan, looking to benefit from cost advantages over dollar transactions.

Payments made in yuan by U.S. companies ranging from Ford Motor Co. to small clothing importers quadrupled over the past year to a record 2.6% of the global yuan total, according to the Society for Worldwide Interbank Financial Telecommunication, a financial-services firm that monitors international currency flows.

The U.S. recently passed Taiwan to become the fourth-largest hub for trade in the yuan outside mainland China, after Hong Kong, Singapore and the U.K., according to Swift.

The yuan is making inroads with U.S. firms now because it is becoming more cost-efficient to pay in the currency. American importers can often negotiate better prices with Chinese suppliers if they agree to use yuan to make a purchase. Chinese companies tend to increase prices when they settle trades in dollars as a way to offset potential exchange-rate fluctuations.

Transactions in yuan still represent a tiny portion of the more than $500 billion in annual trade between the U.S. and China. But companies and banks in both countries say the currency, also known as the renminbi, is starting to gain a foothold in America for the first time since China began loosening restrictions on trading the yuan outside China in 2009.

"More and more of our payments will migrate to the renminbi now that it's easier to do so," said Ryan Hershberger, Ford's treasurer of Asia-Pacific in Shanghai. "We think the benefits will accrue over time."

At the start of a two-day summit in Beijing Wednesday, Treasury Secretary Jacob Lew pressed China to further free up the yuan. U.S. officials have accused China of keeping the yuan weak to help exporters.

Widespread use of the renminbi by U.S. companies would be a milestone in China's push to make its currency more accessible world-wide because the U.S. is the world's largest economy and China's biggest trade partner. The yuan's liberalization is part of the government's long-term goal to allow free-market forces to play a bigger role in the economy, with the aim of shifting the world's financial center of gravity from the U.S. to China.

"If China in the long run is interested in having the renminbi challenge the dollar as a reserve currency, given the size of the U.S. economy, U.S. firms will have to get on board," said Mark Wu, a former World Bank economist who teaches at Harvard Law School.

U.S. companies need to use the yuan for a variety of reasons, including paying for imports from China or protecting against exchange-rate fluctuations. They also need to make yuan transactions if they establish an office in China to pay for things like salaries and office supplies there".

Carl Icahn says 'time to be cautious' on U.S. stocks

 Billionaire activist investor Carl Icahn said on Thursday that it is time for U.S. stock market investors to tread carefully after the run-up on Wall Street.

"In my mind, it is time to be cautious about the U.S. stock markets," Icahn said in a telephone interview. "While we are having a great year, I am being very selective about the companies I purchase."

U.S. stocks fell on Thursday as concerns about the financial health of Portugal's top listed bank gave investors a reason to cash in recent gains. The S&P 500 fell as much as 1 percent at one point before sharply rebounding, to close down -0.41 percent at 1964.68. 

Source: Reuters

Fitch Ratings: Introduction of deferred tax boost Russian banks profits

China June oil, copper, iron ore imports fall for 2nd month

China's imports of crude oil, copper and iron ore fell for a second month in June as factors including unfavourable prices, economic uncertainties and tighter credit weighed on sentiment, but overall demand remained healthy.

Arrivals of soybean and coal ticked up from month ago, although fresh orders of both have slowed to a trickle and imports are expected to fall from July onwards, traders said. [TRADE/CN]

Despite a slowing economy, China's import demand for commodities has generally confounded expectations of a decline.

For the first half, crude imports were up 10 percent on a year ago, copper imports up 26 percent and iron ore up 19 percent.

The resilience has been partly driven by Beijing's pledge to boost infrastructure investment, such as the rebuilding of shanty towns and rail construction, to stabilise growth. Demand for financing, where companies use imports as a way to access cheap loans, has also boosted orders.

Looking ahead, traders and analysts said demand for copper imports appeared the most fragile due to an ongoing probe into a alleged metal financing fraud that has prompted banks to cut back on credit to private Chinese traders.

"Financing activity is the key variable going forward," Citi Research analyst Ivan Szpakowski said in a report. "The trend of metals financing activity shifting to locations outside of China has accelerated over the past month as financing in Chinese bonded warehouses has become more difficult."

Other economic data showed China's trade performance improved in June but still missed market forecasts, reinforcing expectations that Beijing will have to unveil more stimulus measures to stabilise the economy and meet its 2014 growth target. [ID:nL4N0PJ1YD]


CRUDE OIL

Crude oil imports in June fell for a second month, dipping 7.8 percent to 5.66 million barrels per day, but remained up 5.1 percent on a year earlier. [ID:nL4N0PK2UB]

Analysts said the decline in imports was most likely driven by a spike in international crude prices , while accidents and refinery maintenance also contributed.

With most refineries back online, Citi Research said a decline in crude prices in recent weeks is likely to see imports rebound in July.

In the six months, China's crude imports rose to 151.7 million tonnes, up 10.2 percent from a year earlier and more than double the rate in 2013.

"Since crude runs only grew 2.3 percent in the first five months, such high crude imports could only suggest stockpiling, including from the state petroleum reserves," said a Beijing-based senior oil trader.

China imported 2.36 million tonnes of oil products in June and exported 2.25 million tonnes, leaving net oil product imports at 110,000 tonnes, customs data showed.


COPPER

Copper imports fell 7.9 percent in June from a month earlier to 350,000 tonnes, the lowest level since April 2013, as Chinese banks reduced lending for metals imports following a probe into an alleged metals fraud at Qingdao port. [ID:nL4N0PK2VU]

The drop in June shipments was expected. Traders said trading of copper stocks in China's bonded zones came to a virtual halt and banks froze lending for metals imports when news of the alleged fraud came to light in early June.

"Even now, banks are very cautious in giving letters of credit for copper imports," said Zhou Jie, trading manager at China International Futures (Shanghai) Co Ltd, who expects imports to stay weak in July.

In the first half of 2014, imports rose 25.9 percent year-on-year to 2.52 million tonnes, the data showed.


IRON ORE

China's iron ore imports fell for a second month by 3.6 percent to 74.57 million tonnes, as a sharp drop in prices encouraged buyers in the world's top consumer of the steelmaking raw material to hold off on orders. [ID:nL4N0PK2UB]

Spot iron ore prices <.IO62-CNI=SI> slumped 13 percent in May, the biggest monthly fall in a year, and raised expectations of even lower prices. The drop in bookings has been mainly reflected in June's shipment.

Total imports for the first half of the year reached a record 460 million tonnes, up 19.1 percent year-on-year.

"Quite a lot of companies were burnt by the drop in prices and have stopped fresh imports. I think July shipments may recover because of bargain-hunting by steel mills and other big trading houses," said a Qingdao-based iron ore trader.

China's biggest steel mills raised output to record levels in the middle of June, according to CISA data, despite concerns that output growth was continuing to outstrip demand. [STEE/CN]

CISA estimated that 97.2 percent of additional crude steel production in the first five months of 2014 was absorbed by the overseas market.


SOYBEANS

Chinese imports of soybeans rose 7.0 percent in June from May as Chinese crushers keep robust imports from South America, despite negative crushing margins.
China, the world's top soy buyer imported 6.39 million tonnes of the oilseed in June, up from 5.97 million tonnes in May, but down 7.8 percent from 6.93 million tonnes a year ago, according to customs data issued on Thursday.

Imports may start to slow in July, with arrivals seen at 5.8 million tonnes, according to estimate by the official China National Grain and Oils Information Centre. (CNGOIC).

Chinese crushers have been making losses since the second quarter of the year due to a surge in imports and a slowdown in demand growth after outbreaks of bird flu earlier in the year.

"Imports from July onwards are expected to fall every month, partly because supplies from South America are decreasing," said Li Lifeng, an analyst with an industry portal .
Source: Reuters

U.S. jobless claims fall

The number of Americans filing new claims for unemployment benefits fell last week to one of its lowest levels since before the 2007-09 recession, a sign of increasing health in the labor market.

Initial claims for state unemployment benefits dropped by 11,000 to a seasonally adjusted 304,000 for the week ended July 5, the Labor Department said on Thursday.

Economists polled by Reuters had forecast first-time applications for jobless aid to hold steady at 315,000 last week.

Employers slashed their payrolls during the country's deep recession, but the long cycle of aggressive layoffs now appears over.

The four-week moving average for new claims, considered a better measure of underlying labor market conditions as it irons out week-to-week volatility, declined by 3,500 to 311,500 last week. That was the second-lowest reading for the moving average since August 2007. After falling steadily for several years, the moving average has been largely unchanged since the spring.

The labor market, however, is still not fully healed. Firms have been more reticent about hiring and the jobless rate remains elevated.

The Labor Department said there were no special factors influencing the state level data.

The claims report showed the number of people still receiving benefits after an initial week of aid increased 10,000 to 2.58 million in the week ended June 28.
Source: Reuters

Portugal woes sink European stocks

Europe's debt-sodden periphery was back on investors' list of concerns for the first time this year on Thursday, troubles around Portugal's biggest listed bank pushing shares lower and quelling demand for an issue of bonds by Greece.

The noise around BES, whose shares plunged more than 15 percent, drowned out any support for sentiment from Federal Reserve minutes read as showing the U.S. central bank little closer to an outright rise in interest rates.

Stock markets in Germany <.GDAX> and France fell around 1.5 percent while Norway's, also hurt by poor results for its own biggest commercial lender, was down 2 percent.

Yields on bonds issued by the southern European governments at the heart of four years of turmoil for the euro zone rose across the board and Greece managing to place just half of a planned 3 billion euro bond placement.

"It is not ideal timing given all the concerns the market has on Portugal," said Michael Michaelides, a rates analyst at RBS in London.

"We’ve seen a very strong sale in Ireland. The broader correlation still stands in the periphery … but now you see increasingly that when there is a particular story in one country, that market moves a lot more than the others."

Also playing in to the concerns around the euro zone's southern half were data showing the steepest drop in Italian industrial output in almost two years.
U.S. stock futures pointed to a fall of almost one percent at opening. 


STRETCHED

Faith in a rally in shares that dates back to August 2011 has been more shaky over the past month than for some time, as the Fed nears what looks like a definitive end to its programme of new money-printing.

There has been no shortage of warnings that the era of ultra-loose policy may have created a new stock market bubble and another round of financial problems in Italy, Spain, Portugal or Greece, absent for the best part of a year, would be worrying in that light.

The minutes from the U.S. central bank's last meeting, published after European markets had closed on Wednesday, offered no sign it was any closer to following an end to bond-buying with a swift rise in official interest rates.

That boosted U.S. and Asian markets overnight. But the dominant concern in Europe was companies' results and the economy's ability to survive without the new funds which the Fed's bond-buying has forced into the system every month.

Norway's largest bank DNB added to an inauspicious start to the second quarter earnings for some of Europe's biggest companies while construction firm Skanska said it would significantly scale down its loss-making Latin American operations.

"For many the markets are still a bit too expensive considered that the global recovery seems to be progressing somewhat slower than previously hoped," said Markus Huber, an analyst with trading firm Peregrine Black in London.

The dollar <.DXY> , seen as the big beneficiary of any move by the Fed toward higher interest rates, fell by as much as half a cent in response to the minutes but was broadly steady in morning trade in Europe.

Britain's FTSE 100 index was helped by an almost 2 percent rise for Burberry after the luxury brand reported a strong batch of earnings for the first quarter, boding well for other high-end consumer companies.

But oil prices were lower , normally a negative for the commodity heavy index, and helping drive the London market 0.9 percent lower in morning trade. A fall to around $108 a barrel extended the oil market's longest losing streak in four years. The FTSE has fallen every day for a week.


JAPANESE ORDERS

Performance in much of Asia overnight had been more positive, the MSCI's broadest index of Asia-Pacific shares outside Japan  up 0.2 percent.

Tokyo's Nikkei <.N225> fell 0.3 percent, weighed down by a record drop in machinery orders in May that cast doubt over the outlook for capital spending and the strength of its economic recovery.

China, another concern this year for world growth, reported exports in June below market forecasts, although that reinforced expectations that Beijing will have to unveil more stimulus measures to stabilise the economy and meet 2014 growth targets. 
"The import figure showed some signs of improvement on domestic demand. Taken together with weak inflation data, we think domestic demand remains weak," said Wang Jun, an economist at the China Centre for International Economic Exchanges in Beijing.
Source: Reuters

U.S. Stock Futures Drop Amid Portuguese Financial Stress

U.S. stock-index futures fell, indicating the Standard & Poor’s 500 Index will resume a selloff that began earlier this week, as signs of financial stress in Portugal fueled concern about European sovereign debt.

Pandora Media Inc. and Facebook Inc., which trade at more than 85 times reported earnings, slid at least 1.9 percent amid concern valuations in Internet and small-cap stocks have risen too far too fast. Bank of America Corp. and JPMorgan Chase & Co. retreated more than 1 percent to pace losses among financial firms.

Futures on the Standard & Poor’s 500 Index expiring in September lost 0.8 percent to 1,950.60 at 8:34 a.m. in New York. Dow Jones Industrial Average contracts slid 143 points, or 0.9 percent, to 16,770 today, while Russell 2000 Mini Index futures dropped 2 percent.

European stocks and Portuguese bonds tumbled with investor concern deepening over missed debt payments by a company linked to the Iberian nation’s second-largest lender. Portugal’s central bank said Banco Espirito Santo SA is protected after its parent missed the payments. U.S. Treasuries rallied.

Source: Bloomberg