China FDI Barely Grows as Economy Slows

        The WSJ reports, "the amount of new foreign direct investment that China attracted in June barely increased over its year-earlier figure as overseas companies battled higher operating costs and slowing economic growth.

On Wednesday, China is due to release its closely watched second-quarter gross domestic product results, which will provide a closer look at the health of the world's second-largest economy.

"Given the current situation in China, the FDI number will stay low," said CIMB economist Fan Zhang. "If you look at the China economic environment, it's not as good as in previous years. So it's not a good time to enter China."

China's Ministry of Commerce said Tuesday that China attracted $14.42 billion of foreign direct investment in June, a slight 0.2% increase over June 2013.

June's FDI number was up from May's $8.6 billion, which was 6.7% lower than a year earlier.

FDI in the first six months rose a tepid 2.2% year on year to $63.33 billion.

Higher labor costs remain a key concern for foreign companies operating in China. The average monthly wage for migrant workers at the end of 2013 was 2,609 yuan ($420), a 13.9% increase over 2013, the National Bureau of Statistics said in a recent annual survey. That compares with year-over-year rise of 11.8% in 2012 and a jump of 21.2% in 2011.

Slower economic growth after decades of double-digit expansion has also made China less attractive. China's GDP grew by 7.4% year-over-year in the first quarter, its weakest pace in 18 months, down from the 7.7% year-over-year growth seen in the fourth quarter of 2013. Economists expect the second-quarter GDP results due out Wednesday to come in at about the same level as the first quarter.

In a survey released in late May by the European Union Chamber of Commerce in China, just 21% of member companies said China was their first investment choice, compared with 33% two years ago. Intended expansion plans and planned mergers and acquisition figures were also down sharply, the chamber said, as companies grappled with tighter profit margins, stepped-up competition and market-access problems.

A report by the American Chamber of Commerce in China earlier in the year noted a similar trend, although the decline in confidence was less dramatic among U.S. companies. For the first time, those U.S. companies who said they planned to increase their investments in China by 10% or less in 2014 formed the biggest category, while the proportion of companies planning no increased investment in China this year rose to 27% from 16% in 2013".

WSJ: Alibaba Pushes Further Into Entertainment

       The WSJ reports,"Chinese e-commerce giant Alibaba Group Holding Ltd. is making a major push into entertainment to capture a share of what it thinks will be the next boom market in Chinese consumption online.

Although Alibaba has shared only parts of its vision publicly, interviews with roughly two dozen people who have been approached by the company or are familiar with its strategy say that its plans span from taking stakes in Chinese film studios and commissioning original material to acquiring the rights to TV shows or films from inside and outside the country.

On Tuesday, Alibaba is expected to announce a deal with U.S. production studio Lions Gate Entertainment Corp.  to make available on Alibaba set-top boxes offerings such as the "Twilight" hit vampire movie series and the TV show "Mad Men." The partnership beefs up Alibaba's entertainment menu as China's Internet-savvy consumers are increasingly going online to watch TV shows, videos and movies.

"Alibaba is a tremendously successful and dominant partner to have in China," said Jim Packer, Lions Gate's president of world-wide television and digital distribution. "They touch millions of consumers now."

The entertainment industry is a logical next battleground for Alibaba, whose online shopping sites handled $248 billion of business last year, and which is preparing for a U.S. listing that could be one of the largest in history, analysts say. Alibaba and other Chinese rivals such as Internet giant Tencent are trying to find new avenues to get Chinese consumers to open up their wallets.

Alibaba has already made a few important steps toward its goals, paying more than $800 million in June for a majority stake in Chinese film and production studio ChinaVision Media Group Ltd.  , which it subsequently renamed Alibaba Pictures Group. In April, Alibaba announced a tie-up with Internet TV operator and license holder Wasu Digital TV Media Group. Last year, Wasu and Alibaba jointly launched a television set-top box using an operating system developed by Alibaba. Alibaba also has Tmall-branded set-top boxes.

"This is a real knockdown, drag-out type battle in terms of Internet supremacy—trying to capture the hearts and the pocketbooks of Chinese consumers," said Peter Schloss, a Beijing-based media-industry veteran and investor.

In 2012, China became the world's second-biggest movie market, behind the U.S. Revenue from China's film market, including box-office receipts, is expected to grow 33% this year to $5.94 billion, six times more than in 2009, according to market research firm EntGroup.

At the same time, China's more than 600 million Internet users are increasingly watching videos online, especially on smartphones. The number of people who watched or downloaded videos on their mobile phones last year rose 84% to 247 million, according to a January report from the China Internet Network Information Center. The figure is expected to grow as Chinese mobile carriers adopt faster fourth-generation networks that are more suitable for video viewing.

One challenge for Alibaba will be showing investors that it has sizable growth opportunities outside China's e-commerce industry, where it is the dominant player, according to David Wolf, managing director of the global China practice for Allison + Partners LLC, a marketing and consulting firm.

In recent days, Alibaba has approached film studios in China about creating or acquiring films and TV shows it can stream online, according to people familiar with Alibaba's plans. Alibaba is also looking to stream international film and video, other people familiar with Alibaba's plans said.

The e-commerce giant has also approached film studios in China with proposals to invest in them. In exchange for stakes in those studios, Alibaba, in some cases, offered them both cash and a stake in Alibaba Pictures Group, according to one person familiar with the discussions.

Executives representing Alibaba in those discussions included the head of Alibaba's investment arm, according to the person. Alibaba told some studios that it could help fund their film projects, as well as distribute and promote them, this person said. Alibaba could sell and promote movie tickets on Taobao, its online bazaar of 7 million merchants, the person recalls being told.
Source: Reuters

BOJ stands pat on policy, trims economic forecast

The Bank of Japan kept monetary policy steady on Tuesday and slightly trimmed its economic growth forecast for the current fiscal year, reflecting soft exports and a bigger-than-expected slump in household spending after the April sales tax hike.

In a quarterly review of its long-term projections, the central bank maintained its forecast that consumer inflation will gradually accelerate towards its 2 percent target next year.

As widely expected, the BOJ voted unanimously to maintain its pledge of increasing base money, or cash and deposits at the central bank, at an annual pace of 60 trillion to 70 trillion yen ($592-$691 billion).

BOJ Governor Haruhiko Kuroda will hold a news conference from 3:30 p.m. (0630 GMT).

The BOJ has stood pat since launching an intense burst of stimulus in April last year, when it pledged to double base money via aggressive asset purchases to achieve its 2 percent inflation target in roughly two years.

The central bank issues a semiannual report on the outlook of the economy and prices in April and October of each year. It reviews the forecasts in January and July.
Source: Reuters

China eases cross-border investment, financing controls

China announced another modest easing of foreign exchange controls Monday, allowing offshore investment and financing through special purpose entities (SPEs).

SPEs are legal entities created overseas to isolate a firm from financial risk or even to hide ownership or debts.

Citizens can invest onshore assets or equities in offshore SPEs after they register at with State Administration of Foreign Exchange (SAFE) and can trade in foreign currencies to raise capital for offshore SPEs. SAFE also removed the restriction on domestic enterprises transferring assets or equities to offshore SPEs.

It is no longer necessary for SPEs to remit profits, bonuses or income from capital changes within 180 workdays, according to the SAFE document.

The new rules are the latest step in the internationalization of the yuan.

Source: Xinhua

China stocks rise on new energy drive

 Chinese shares closed higher on Monday, led by a surge in new energy-related shares as authorities unveiled a plan to encourage government organs to buy more new energy vehicles.

The benchmark Shanghai Composite Index rose 0.96 percent to finish at 2,066.65 points, and the Shenzhen Component Index gained 1 percent to close at 7,278.86 points.

The new energy vehicle plan, released on Sunday, has been hailed as a move to fight pollution and boost this nascent sector of the car market.

From 2014 to 2016, new energy vehicles will account for no less than 30 percent of cars newly purchased by state organs every year, under the plan.

Boosted by the news, shares including those related to charging stations and lithium batteries rallied across the board.

Ankai Automobile Co., Ltd, a producer of new energy coaches, surged by the daily limit of 10 percent to end at 4.91 yuan (0.8 U.S. dollar) per share, while Sinoma Science and Technology Co. gained 8.74 percent to end the day at 11.95 yuan.

Source: Xinhua

China: More bank loans help redevelop rundown areas

China Development Bank (CDB) granted loans totaling 219.5 billion yuan (35.70 billion U.S. dollars) to redevelop rundown urban areas in the first half of 2014, benefiting 2.13 million families, it said on Monday.

Of the total, 195 billion yuan was lent after an early-April State Council meeting laid special stress on accelerating renovation projects.

CDB Chairman Hu Huaibang said the loans will exceed 400 billion yuan this year and the bank will do its best to improve efficiency in the use of the money.

China is speeding up efforts to provide decent housing for people living in rundown areas as one of its major tasks in the urbanization process.

Source: Xinhua

Xinhua: China's fiscal revenue growth modest, expenditure surges

China's fiscal revenue grew by a modest 8.8 percent in the first half of 2014 while its expenditure surged upon accelerated spending on key projects, the Ministry of Finance (MOF) said on Monday.

Fiscal revenue rose 8.8 percent year on year to 7.46 trillion yuan (1.21 trillion U.S. dollars) from January to June, with 3.43 trillion yuan collected by the central government, up 6.2 percent from a year ago.

The 6.2-percent growth was slower than a budgeted increase of 7 percent set during the annual legislative meeting in March.

In June alone, central government revenue stood at 547.7 billion yuan, up 5.8 percent year on year, while local government revenue amounted to 798.4 billion yuan, up 10.9 percent from the same period last year.

June's total fiscal revenue increased 8.8 percent year on year to 1.35 trillion yuan, accelerating from a 7.2-percent rise in May, according to the ministry.

It explained that revenue received by the central government last month continued a trend of slow growth due to a decline in value-added tax (VAT) and increasing tax rebates for exports.

Revenue from the transfer of land use rights for state-owned land, a source of revenue for local governments other than taxation, rose 26.3 percent from a year ago to 2.11 trillion yuan in the first half, but logged a meager 7.3-percent growth in June, the ministry added.

However, fiscal expenditure maintained double-digit growth. In the first six months, total national fiscal spending expanded 15.8 percent from a year ago to 6.92 trillion yuan. For June alone, the figure surged 26.1 percent to 1.65 trillion yuan.

Local governments spent 1.45 trillion yuan in June, drastically up 28.3 percent year on year, while the central government spent 201.7 billion yuan, up 12.3 percent.

Spending on key projects in housing security, transportation, urban and rural development, and grain and oil reserves reached as high as 20 percent or more, the MOF said.

The combination of a modest growth in fiscal revenue and fast fiscal spending posed a challenge for governments at various levels, especially as the country tries to push forward across-the-board reform amid downward pressures.

China's economy grew 7.4 percent year on year in the first quarter, the highest of all major economies but below the full-year target of 7.5 percent. Data for the first half is expected to come out on Wednesday.

As part of the grand reform plan, China has vowed to build a comprehensive, transparent and efficient fiscal and tax system, pointing to fiscal revenue and spending of higher quality, as indicated in a statement released after a central leadership meeting in late June.

One of the highlights of the reform is a program to replace business tax with VAT in some service sectors, which analysts said may reduce tax revenue to some degree in the short term.

China aims to fulfill key tasks in the new round of fiscal and tax reforms by 2016, and establish a "modern fiscal system" by 2020.

China June fiscal spending jumps 26.1 pct y/y as Beijing spurs flagging economy

 China's fiscal expenditure surged 26.1 percent in June from a year earlier to 1.65 trillion yuan ($265.84 billion), reflecting government efforts to speed up spending to shore up the economy.

Spending growth accelerated from a rise of 24.6 percent in May.

Of the total 6.9 trillion yuan of government spending in the first six months, money disbursed on public housing projects grew the most, surging 30.2 percent from a year ago to 201.9 billion yuan, the finance ministry said on Monday.

Expenditure on medical and healthcare sectors rose 18.4 percent in the first half to 490.5 billion yuan, while spending on rural-urban community projects grew 23.6 percent to 618 billion yuan.

The finance ministry had earlier urged local governments to quicken the pace of budget allocation to guarantee the completion of key projects and lift the slowing economy.[ID:nL3N0OE20L]

Recent data and activity surveys have pointed to some signs of stabilisation in the economy as a raft of government stimulus measures kick in, but many economists believe more policy support still may be needed if Beijing wants to deliver on its 2014 economic growth target of around 7.5 percent.

"Data in June so far have looked relatively weaker compared to past periods of rebound," HSBC said in a research report late last week.

"This means downside risks to growth still cannot be underestimated in the second half and policy makers should step up their easing effort to sustain the recovery."

Monday's data also showed China's fiscal revenues rose 8.8 percent in June from a year ago to 1.3 trillion yuan, the ministry said in a statement published on its website,www.mof.gov.cn

The June reading of fiscal income is a touch higher than an increase of 7.2 percent in May, though the finance ministry warned that the slowing broader economy and tax cuts for selected industries could continue to weigh on fiscal revenues in the second half of this year.

The government reports second-quarter gross domestic product on Wednesday.

Aided by stimulus measures, China's economy probably steadied in the second quarter with annual growth holding firm at 7.4 percent, a Reuters poll showed, suggesting that a recovery is taking hold.
Source:Reuters

YouTube weighs funding efforts to boost premium content

 YouTube has embarked on a new round of discussions with Hollywood and independent producers to fund premium content, two sources with knowledge of the talks told Reuters, a move that could bolster a three-year-old multimillion-dollar effort that has had mixed success so far.

The talks underscore Google Inc's desire to complete YouTube's transition from a repository for grainy home videos to a site sporting the more polished content crucial to securing higher-priced advertising.

Over the past two months, YouTube executives have begun making the rounds, talking to Hollywood producers to explore the kinds of support it could offer its content creators and produce more must-see programming, according to the two people.

Executives did not lay out exactly how a program would be structured. One of the two people said the site may offer between $1 million and $3 million to produce a series of programs, and might contribute marketing funds as well.

The second person said the site was interested in videos shorter than the 30-minute, TV network-quality Web shows that Amazon.com Inc and other online sites have recently funded.

"We are always exploring various content and marketing ideas to support and accelerate our creators," a YouTube representative said in an email. The site declined to comment on the meetings.

The latest round of discussions is in its initial phases and actual measures may never materialize, the sources said.

YouTube is by far the world's most popular location for video streaming, with more than 1 billion unique visitors a month, far surpassing Netflix Inc and Amazon. But it is trying to lure more marketers for premium video advertising, boosting margins as overall prices for Google's advertising declines.

YouTube set aside an estimated $100 million in late 2011 to bankroll some 100 channels, though it never confirmed amounts spent or other details. Beneficiaries of that largesse included Madonna and ESPN, as well as lesser-known creators. Reuters was one of the companies that received funds for a channel.

But few of those have garnered much mainstream attention.

"Over 115 of the channels launched as part of that initiative are now in the top 2 percent most-subscribed to channels on the platform," a company representative said in an email.

YouTube has continued to provide backing for its content creators. It provides production facilities for creators, offers tips on how best to create content, and provides small amounts of funds for creators to test ideas.

The site also provides marketing support for online celebrities, including paying for billboards and TV ads for the likes of beauty blogger Michelle Phan and baker Rosanna Pansino.

Source: Reuters

The real shale revolution by John Kemp

 By now everyone knows the shale revolution was made possible by the combination of horizontal drilling and hydraulic fracturing.

But although fracking has captured the popular imagination, and is often used as a synonym for the whole phenomenon, horizontal drilling was actually the more recent and important breakthrough.

Mastery of horizontal drilling around 1990, originally for oil rather than gas exploration, was the decisive innovation that lit the long fuse for the shale revolution that erupted 15 years later.

"Horizontal drilling is the real marvel of engineering and scientific innovation," David Blackmon wrote in Forbes magazine last year ("Horizontal drilling: a technological marvel ignored", January 2013).

"While impressive in its own right, the main innovations in fracking have been beefing up the generating horsepower to accommodate horizontal wells rather than vertical ones, and refining of the fluids used to conserve water and create better, longer lasting fractures in the target formation."

Fracking has captured the imagination because it is controversial, sounds sinister and like an expletive, makes for good headlines, according to Blackmon.

But that has obscured the far more important role played by horizontal drilling in enabling oil and gas to be produced from previously inaccessible rock formations, revolutionising energy output and even international relations.


DAWN OF FRACKING

Fracking has been in widespread use for more than 50 years. U.S. companies began to experiment with using fracturing to release coal seam gas in the 1940s.

"The basic principle behind underground coal gasification seeks to find an economically feasible process of burning coal seams that are so situated that they do not lend themselves to being mined profitably," the New York Times explained in 1954

("New tests made to gasify coal", Oct. 31, 1954).

"The gases captured from burning the coal seams would eventually be turned into usable fuels for commercial or industrial power."

"The test will be performed by hydraulic fracturing," the paper noted, "in an effort to open up air passages inside the coal seam" to make it burn more freely and produce a greater quantity of natural gas.

"Waste petroleum oil bolstered with napalm is pumped into the well by high-pressure pumps. Sand is mixed with the oil. Pressure as high as 12,000 pounds per square inch can be built up."

"The tremendous pressure cracks the formation and the penetrating liquid oozes into the open channels," the Times observed. "Kerosene is added to thin the fracturing liquid and the opening is pumped out. The sand remains to prop open the fractures."

In the next few decades, hydraulic fracture treatments, as well as treatments using concentrated acids to shatter carbonate formations, were performed on tens of thousands of ordinary oil and gas wells across the United States and in other parts of the world (though the use of napalm was eventually phased out).

The initial experiments were conducted by the U.S. Bureau of Mines, in conjunction with oilfield services firm Halliburton and others - underscoring the critical role which the federal government has played in association with private enterprise in fostering innovation at every stage in the energy revolution.


THE TURNING POINT

Horizontal drilling is both newer and older than fracking.

The first horizontal wells were drilled more than 2,000 years ago to produce water on Iran's central plateau and in Egypt's Western Desert at the time of the pharaohs.

Horizontal wells were noted by the ancient Greek historian Polybius, who explained how they were used to increase water production. The history of horizontal drilling was related in the January 1996 special edition of Schlumberger's "Middle East Well Evaluation Review: Horizontal Highlights," which is worth reading in full.

The modern history of horizontal drilling dates back around 100 years. The first patent for a horizontal drilling technique was issued in 1891. The main application was for dental work but the applicant noted the same techniques could be used for heavy-duty engineering.

The first true horizontal oil well was drilled in Texas in 1929. Another one was drilled in Pennsylvania in 1944.

China tried horizontal drilling in 1957 and the Soviet Union tried the technique in the 1960s and 1970s, according to the U.S. Energy Information Administration (EIA) ("Drilling sideways: a review of horizontal well technology and its domestic application", April 1993).

But horizontal drilling was expensive, costing up to three times as much as conventional vertical wells, and therefore remained rare.

The turning point when horizontal drilling went mainstream can be dated quite precisely.

"Before 1990, horizontal drilling was not a popular technique. The oil industry only drilled horizontal wells as a last resort," Schlumberger explained.

"The global total for 1989 was just over 200 horizontal wells. In 1990, that total leapt to almost 1,200 wells, with nearly 1,000 of these drilled in the United States."

The extra cost for drilling horizontally had shrunk to just 17 percent, according to the EIA, as more companies experimented with the technique and benefited from learning curve effects.

To drill horizontal wells quickly and cost effectively, the industry had to master the use of flexible drill pipe and steerable down-hole motors, as well as technology enabling drillers to monitor changes in the rock in real time so the well bore can be kept within the target formation.


THE LONG FUSE

Most oil and gas is found in sedimentary basins where the rock formations underground are layered like a stack of pancakes.

The most promising formations may only be a few hundred feet thick, even if they extend for hundreds of square miles in area.

For that reason, vertical wells only come into contact with the reservoir rock for a few hundred feet. By contrast, a well drilled through the target formation horizontally can contact the reservoir for hundreds of metres or even several kilometres.

Originally, horizontal drilling was restricted to formations which were hard to produce because they had low permeability

(like shale and chalk), or were nearing exhaustion, or where conventional drilling produced too much water too quickly and not enough oil and gas.

French oil firm Elf Aquitaine drilled the first modern horizontal wells in southwest France and in the Mediterranean off Italy in the early 1980s. BP used horizontal wells at Prudhoe Bay in Alaska to minimise unwanted water and gas intrusions into its oil reservoir.

But from 1990, the technique started to proliferate. Most of the early wells were drilled into the Austin Chalk in Texas at the Giddings Field and Pearsall Field, as many as 850 in 1990 alone. Most of the rest were drilled into North Dakota's Bakken, according to the EIA.

By August 1990, horizontal wells were producing 70,000 barrels per day of oil in Texas.

In 1986, Oman's national oil company drilled three horizontal wells into a problematic reservoir, with disappointing results. But from 1990, a much more ambitious and successful programme was begun. By the end of 1994, Petroleum Development Oman had drilled more than 200 horizontal wells.

In the early 1990s, more than 50 horizontal wells were also drilled in Abu Dhabi, and Saudi Arabia also embraced the technique for its depleted Watra oil field in the Neutral Zone shared with Kuwait, according to Schlumberger.


AMBITIONS FULFILLED

The tremendous potential of horizontal drilling was recognised right from the start. "Success led some people to speculate that by the end of the century 50 percent of all new wells drilled in the United States would be horizontal," Schlumberger wrote in 1996.

That prediction turned out to be premature - but only by a few years. The number of oil and gas wells being drilled horizontally overtook the combined number of vertical and directional (slanted) wells for the first time in March 2010 (http://link.reuters.com/wan42w).

Two-thirds of oil and gas wells are now drilled horizontally, according to the weekly rig counts published by oilfield services company Baker Hughes .

It took roughly a decade of experimentation, between 1993 and 2003, to work out how to combine horizontal drilling and hydraulic fracturing in the Barnett shale in Texas, an approach pioneered by George Mitchell at the eponymous Mitchell Energy.

Many of the improvements developed producing gas from the Barnett were then applied back to oil production from North Dakota's Bakken and then the Eagle Ford shale in Texas.

From 2003, however, the number of wells drilled horizontally has grown exponentially. In fact, horizontal wells have largely replaced vertical and directional wells, on account of their greater reservoir contact and efficiency.

The shift was foreseen by Schlumberger: "In simple terms, horizontal wells allow us to do things more efficiently than vertical wells. It would be short-sighted to ignore a technique which offers improved drainage in typical reservoirs and more discrete compartments in complex reservoirs, while helping reduce gas and water coning."


LESSONS LEARNED

Commentators often write about the shale revolution as if it began in Texas in the early years of the 21st century. But no revolution emerges from nowhere. The fuse for the shale revolution was lit at least at decade earlier.

The authors of articles about horizontal drilling back in the late 1980s and mid-1990s would have been surprised it is seen as a 21st century phenomenon given how much of the revolution had been anticipated 20 years earlier.

Commentators, particularly those sceptical about fracking, also draw a sharp distinction between "good" conventional oil and gas well and "bad" unconventional fracked ones.

But history shows there is no clear division between conventional and unconventional oil and gas production.

Fracking and horizontal drilling have both been widely applied in both conventional and unconventional contexts.

Techniques pioneered to extract oil and gas from conventional but complicated formations have then been applied back into unconventional contexts, and vice versa.

Finally, the history of fracking and horizontal drilling demonstrates the long lead times needed to perfect and diffuse new technologies.

New technologies often go unrecognised, at least by those outside the field, for years before they burst into mainstream discourse.

So the next generation of technologies which will revolutionise oil and gas production are probably already out there being practised on a small scale – waiting to be improved and discovered more widely.

Source: Reuters

Goldman Stays Gold Bear as Bullish Wagers Increase

Goldman Sachs Group Inc.’s Jeffrey Currie isn’t backing down from his bearish call on gold.

As bullion’s 9 percent rally this year beats gains for equities, commodities and Treasuries, he’s sticking with the view that the metal will be lower by the end of December as the economy improves. Currie, who last year got ahead of the biggest gold collapse since 1980, is an undeterred bear even as hedge funds add to their bullish holdings for a fifth straight week and assets in exchange-tradedproducts advance.

Currie isn’t alone in predicting the end to a rebound that drove the best first-half performance for gold since 2010. Societe Generale SA’s Michael Haigh, who also correctly forecast 2013’s slump, said in a July 11 report that he expects the metal will drop about 5 percent by the fourth quarter. Defying the analysts, money mangers are now holding the biggest bet on a bullion rally since 2012 as prices posted the longest streak of weekly gains in three years.

“Some people are moving into inflationary hedge assets,” Currie, the bank’s global commodities research head with a Ph.D in economics from the University of Chicago, said in a July 11 telephone interview. “Gold will start moving lower once there is more confidence in the recovery, without significant inflationary concerns.” Prices will “likely end lower this year,” he said.

Currie on April 10, 2013, issued a sell recommendation, before a two-day 13 percent plunge that ended April 15, 2013, and left prices in a bear market. The slump wasn’t foreseen by most money mangers, who had increased their bullish bets by 11 percent the prior month. The investors cut holdings to a six-year low by December.

Now, Currie expects bullion to drop to $1,050 by the end of 2014, maintaining a forecast from the start of the year. SocGen’s Haigh sees the metal at $1,245 in the fourth quarter.

Investors aren’t convinced prices will fall. After violence spread in Iraq and Ukraine and the Federal Reserve signaled it will keep interest rates low, the need for a haven asset resurfaced and gold was back in favor. Holdings in bullion-backed ETPs rose for three straight weeks through July 11, the longest stretch in four months. Last year, more than $73 billion was wiped from the value of funds as investors sold 869 metric tons of the metal.

Interest Rates

Yields on 10-year Treasury notes, about 3 percent at the beginning of the year, have come down to 2.5 percent, as the Fed has signaled it’s in no rush to boost interest rates. The central bank in June repeated its view that the rates are likely to stay low “for a considerable time.” Goldman this month revised its forecast for higher borrowing costs to the third quarter of 2015, rather than the first three months of 2016, citing an accelerating economy.

Bullion jumped 70 percent from December 2008 to June 2011 as the Fed bought debt and held borrowing costs at an all-time low.

“There have been too many bears in the woods in spite of gold climbing,” George Gero, New York-based precious metals strategist who helps manage $500 million at RBC Capital Markets LLC, said July 10. “Geopolitical tensions in various parts of the world and economic surprises are attracting more investors. Probably we will see a re-rating of those bearish forecasts.”

Bullion is still down 32 percent from an all-time high of $1,923.70 reached in September 2011 as the U.S. economy showed signs of sustained growth. Jobless claims declined to 304,000 in the week ended July 5, the fewest in more than a month, a government report showed July 10. The Standard & Poor’s 500 index rose to a record this month.

Source: Bloomberg

Iran oil tanker firm still faces sanctions after EU blacklisting annulled

Iran's main oil tanker firm NITC will struggle for some time to call at European ports, get foreign insurance and overcome obstacles under western sanctions, even after a top court has annulled its blacklisted status in the European Union.

An interim deal between Iran and world powers signed in November has provided the Islamic Republic with some sanctions relief, helping to boost oil sales. But continued restrictions on shipping and insurance have meant that a return to Tehran's pre-sanction export level of over 2 million barrels per day

(bpd) is still some way off.

The European court ruling "will not give them carte blanche to transport cargoes," said Andrew Bardot, executive officer of the International Group of P&I clubs, an association whose members insure the majority of the world's tanker fleet.

NITC, sanctioned by both the European Union and the United States, contested the EU's 2012 blacklisting designation, arguing that the firm is privately owned by Iranian pension funds, whose beneficial owners are pensioners. It has denied any links with the government or with the Revolutionary Guards.

The Luxembourg-based General Court, the second-highest court in the EU, said in a ruling delivered on July 3 that there was not "the slightest evidence capable of supporting" claims by the Council of the European Union that NITC was controlled by the government of Iran or that it provided financial support to the state via its shareholders. The court upheld NITC's plea that the European Union had made a "manifest error of assessment".

"It follows that there is no justification for the listing of the applicant," the ruling said, ordering the EU to pay NITC's court costs.

The court said, however, that its ruling would be suspended pending the expiry of the period for any appeal to be lodged. Rulings are typically suspended for two months pending appeals.

Over the past few years NITC has frequently changed the names of its vessels and their flags to conceal its activity.

NITC Managing Director Ali Akbar Safa'ie has been quoted by Iranian media in recent days as saying he hoped the firm would be able to return to European markets.


OIL SHIPPING LIFELINE

With a fleet of 37 supertankers and 14 smaller tankers, NITC has an overall carrying capacity of around 86 million barrels of oil and has played a crucial role in keeping Iran's exports flowing to buyers, especially in Asia.

Shipping industry sources said it was premature to expect NITC to reap any major gains, given that the carrier is still sanctioned by the United States and that the EU court ruling may be appealed.

"This will have no effect as long as the status quo continues. This means NITC will continue to transport oil sold cheaply and offload it in places like Asia including by ship-to-ship transfers on to other vessels. They are still experiencing some difficulties," one shipping industry source said.

"When the full fleet comes back, it will have a big impact as you will have millions of deadweight tonnes back on the international tanker market. If we assume there will be a nuclear deal with Iran, we are still talking 12 to 18 months before NITC is fully back."

Iran and the United States, France, Germany, Britain, Russia and China aim to reach a long-term deal by a July 20 deadline. Many diplomats and analysts say, however, that an extension may be needed in view of the wide gaps in negotiating positions.

Even if they meet the July 20 deadline, it is likely to take months to renegotiate trade contracts with shipping partners and brokers as well as secure international insurance cover, given that policies are typically renewed every year in February.

Under the interim agreement signed in November, which came into effect in January, Iran's exports should average 1 million bpd through to July 20. They have been above that level for several months now. 

The accord included an easing on restrictions on ship insurance and allowed for less difficult shipping of oil that the OPEC member was permitted to sell to mainly Asian buyers.

But NITC is still unable to secure ship insurance from top providers in the West. Specialist protection and indemnity (P&I) insurers, mutually owned by shipping lines, dominate the market for insuring ocean-going vessels against pollution and injury claims, the biggest costs when a tanker sinks.

"The International Group clubs have not been providing P&I cover to shipowners engaging in the temporarily permitted Iranian trade due to the lack of confirmation from the EU/US that cover will be able to respond beyond the expiry of the six-month temporary suspension measures on 20 July," Bardot said.

NITC still will be hampered by western banking restrictions on the financing of cargoes as Iranian banks struggle to trade with their international banking counterparts.

"European financial institutions are still reluctant to use

(Iranian) banks that have been successful in getting off the EU list through law suits," said a former U.S. Treasury official now working in the private sector and dealing with sanctions.

"I would expect the European financial institutions would say, from an anti-money-laundering risk perspective, they are still not ready to do the business. This would include NITC

Source: Reuters

As some high-risk assets take a hit, investors fear worse is to come

World financial markets became reacquainted with fear last week, and even if it was short-lived, the ructions in some riskier assets looked to some like a precursor to a much rougher ride down the road.

Concerns that Portugal’s largest listed bank, Banco Espirito Santo was badly exposed to its owners’ accounting problems raised eyebrows in Europe and the U.S., getting investors to ask whether there were more shoes to drop in European banking.

Also some excess speculation that has been building up in various corners has bubbled over. Examples included the halt in trading in the stock of a company, Cynk Technology , with no assets or revenue, that had soared to a $6.4 billion market value, and the sudden collapse of Spanish wireless provider Gowex after a massive accounting fraud.

Add in the big reversal in fortunes for some companies who recently did U.S. IPOs, plus Puerto Rico's increasingly troubled debt picture, and it was tempting to remember Warren Buffett’s old saying: “Only when the tide goes out do you discover who’s been swimming naked.”

Billionaire investor Carl Icahn said he has become very wary. "In my mind, it is time to be cautious about the U.S. stock markets," he said in a telephone interview on Thursday.

"While we are having a great year, I am being very selective about the companies I purchase." [ID:nL2N0PL27S]

It all comes against a backdrop of anxiety about whether global markets and economies are resilient enough to cope when the U.S. Federal Reserve takes the punch bowl away by ending its bond buying program and then starts to raise interest rates – probably next year - for the first time since 2006.

The sense of complacency that had set in among many investors has begun to disappear. Small-cap U.S. stocks fell more than 4 percent last week, their worst one-week performance in more than two years, while Spain’s Banco Popular postponed a bond offering and Greece could only place about half of what it wanted in a debt sale.

What's unclear is whether this is all about a short-lived, modest correction in some high-risk assets that had gotten out of control, or if its a harbinger of something more dramatic to come. Some are confident there will be a correction.

"I don’t care if it's Portugal, Ukraine, Russia or the Fed, markets are due for at least a pause or potentially a 10 to 12 percent pullback on a trading basis," said Jeffrey Saut, chief investment strategist at Raymond James Financial in St. Petersburg, Florida.

A correction of about 10 percent would generally be welcomed by large institutional managers, as the S&P 500 has not dropped by that amount in about three years. In recent weeks it has come within range of the 2,000 mark for the first time ever, having nearly tripled from its lows in 2009 during the financial crisis.


FAR FROM PANICKING

The concerns about Banco Espirito Santo may have crystallized fears some investors have about overheated credit markets but panic is far from setting in.

European government debt is still trading at levels not far from U.S. debt. Italy last week completed a sale of 7.5 billion euros, with the three-year and 15-year debt sales hitting their lowest yields in the euro's lifetime.

And while some of the optimism in the junk debt market has started to fade, the bears are far from taking over. The spread on the riskiest U.S. high-yield corporate bonds, those rated triple-C or less, has widened by about 0.35 percentage point against benchmark Treasuries since June 23, according to Bank of America-Merrill Lynch data, but the levels are still not far from their tightest since 2007.

“This correction only serves as a reminder that nothing is yet fixed in the euro zone and that, no matter how much money the ECB (European Central Bank) ends up printing, it will not jump-start the euro zone’s economies," said Phoebus Theologites, chief investment officer at SteppenWolf Capital in Lucerne, Switzerland. “But this does not mean we will get contagion or a crash,” he added.

Low borrowing rates across the globe, balance sheets that are in generally good shape for deal making or stock buybacks, and profits that are growing modestly in the U.S. and beyond are all reasons not to get too scared. Even valuations aren’t that stretched on some historical measurements.

Brian Reynolds, chief market strategist at Rosenblatt Securities, pointed out that pension funds and others have been steadily pouring money into corporate credit, even in what's usually a slow month of July.

High-yield issuer General Motors Financial borrowed $1.5 billion last week while U.S. power company Calpine Corp refinanced $2.8 billion in high-yield bonds. Overall, 2014 has seen high yield issuance of $183.6 billion so far, on pace for the busiest year ever, according to Thomson Reuters.

"Credit booms are littered with defaults," Reynolds said in reference to some recent problems. "So it's not a big deal. But the last five years has shown that if people want to panic for a few weeks, they may."

He says the S&P 500 could undoubtedly correct in coming days, pulling back to 1950 or even 1900, but the steady flows into corporate credit that has funded stock buybacks should keep the stock-market rally going for several more years.

David Joy, chief market strategist at Ameriprise Financial in Boston, where he helps oversee $771 billion in assets under management, says the jitters evinced in equities may be an early taste of the kind of reaction investors should expect when the Fed reaches the point of raising rates.

He attributes the recent modest uptick in market volatility to statements from Fed officials concerned about the need to normalize Fed policy, by starting to raise rates, while they also expressed concern about "complacency" in the markets.

He expects the Fed could start raising rates about six months after the expected end to bond buying in October of this year.


OVERHEATED PRICES

The easy money from the Fed and other central banks has helped lubricate more than just the equity and bond markets in recent years – whether the prices of sports teams and players, art or high-end apartments around the world.

Some investment strategists are concerned that the “smart money” is getting out of some areas, leaving others to face potential losses. Jason Goepfert, founder of Sundial Capital Research, points out that about 60 percent of IPOs in the last six months have involved some sort of exit for venture capital or early-stage investors, a higher percentage than any time in the last several years.

There has been notable underperformance from some U.S. companies that only first sold shares in the past year. Storage products retailer Container Store Group , which only went public in November, last week warned of weak forthcoming results; its stock has now lost almost half of the price it reached at the end of last year. Sandwich chain Potbelly Corp also disappointed investors after the initial euphoria there was during its October debut. It has now lost about two thirds of the value it reached then.

Twitter Inc , which sold shares to great fanfare in November, and saw its stock price almost triple in about seven weeks, has since dropped 48 percent.

"I wouldn’t hesitate to take profits here. I wouldn’t get out of the markets by any means, but there is a correction on the horizon somewhere," Joy said.

Source:Reuters

Ukraine says Russian army officers fighting with rebels

Ukraine on Monday accused Russian army officers of fighting alongside separatists in the east of the country and said Moscow was once more building up its troops on the joint border.

President Petro Poroshenko held an emergency meeting of his security chiefs after a weekend of Ukrainian air strikes on rebel positions near the border with Russia and charges by Moscow that Kiev killed a Russian man with a cross-border shell.

The war of words between Kiev and Moscow and intense fighting, in which Ukrainian forces say they inflicted heavy losses on the rebels, marked a sharp escalation in the three and a half month conflict in which several hundred Ukrainian servicemen, civilians and rebels have been killed.

"Information has ... been confirmed that Russian staff officers are taking part in military operations against Ukrainian forces," Poroshenko said.

Poroshenko made similar complaints of Russian incursions on Sunday to the European Union with an eye to pushing the bloc to exert greater pressure, and possibly more sanctions, on Moscow.

Poroshenko told his security chiefs that government forces, which suffered the loss of 23 servicemen in a rocket attack on an army camp last Friday, were now facing a new Russian missile system and there would have to be a change in tactics. He gave no details.

Accusing Russia of embarking on a course of escalation in Ukraine's eastern regions, National and Security Council spokesman Andriy Lysenko told journalists:

"In the past 24 hours, deployment of (Russian) units and military equipment across the border from the Sumy and Luhansk border points was noticed. The Russian Federation continues to build up troops on the border."

Moscow's response to the cross-border shelling and the Ukrainian reports of Russian troops being moved up to the border raised again the prospect of Russian intervention, after weeks in which President Vladimir Putin had appeared intent on disengaging, pulling back tens of thousands of troops he had massed at the frontier.


MILITARY SUCCESS

The Ukrainian army said it had achieved a notable success by breaking a rebel encirclement of Luhansk airport on Sunday night. A spokesman for the so-called Luhansk People's Republic said that 30 volunteer fighters had been killed in Ukrainian fire on Oleksandrivka, a village to the east of the town, Russia's Interfax news agency said.

As military action continued on Monday near the rebel-controlled border town of Luhansk, security officials said contact had been lost with a government AN-26 military transport plane over the Luhansk region.

Lysenko said separatists, backed by what he described as Russian "mercenaries", had fired on Ukrainian border guards in an attempt to give cover as armoured vehicles and equipment were being brought into the country.

And he again rejected Russian charges that Ukraine forces had fired a shell over the border killing a Russian man on Sunday - an incident that Moscow has described as an "aggressive act" which would have "irreversible consequences".

"The (rebel) fighters systematically fire mortars and shoot into Russian territory, which killed a Russian citizen," Lysenko told journalists.

In a weekend of fierce combat, Ukraine's military said its warplanes had inflicted heavy losses on the pro-Russian separatists in air strikes on their positions, including an armoured convoy which Kiev said had crossed the border from Russia.

Poroshenko's office said Kiev would present documentary proof of incursions from Russia to the international community via diplomats.

But Russia kept up pressure on Kiev over the cross-border shell incident. A Russian newspaper, citing a source close to the Kremlin, said on Monday that Moscow was considering the possibility of pinpoint strikes on Ukraine in retaliation.


EU SANCTIONS

Poroshenko on Sunday complained of alleged Russian incursions into Ukraine in a telephone call with the European Union's Herman Van Rompuy.

The EU - Ukraine's strategic partner with which it signed a landmark political and trade agreement last month - targeted a group of separatist leaders with travel bans and asset freezes on Saturday but avoided fresh sanctions on Russian business.

The conflict in eastern Ukraine erupted in April when armed pro-Russian fighters seized towns and government buildings, weeks after Russia annexed Ukraine's Crimea peninsula in response to the overthrow of a pro-Moscow president in Kiev.

Well over 200 Ukrainian servicemen had been killed in the fighting and several hundred civilians and rebels.

The fighting has escalated sharply in recent days after Ukrainian forces pushed the rebels out of their most heavily fortified bastion, the town of Slaviansk.

Hundreds of rebels, led by a self-proclaimed defence minister from Moscow, have retreated to the Ukrainian city of Donetsk, built reinforcements and pledged to make a stand. The once-bustling city has been emptying in fear of a battle.

Rebel fighters on Monday were evacuating about 200 Donetsk residents by bus across the Russian border into the Rostov area.
Source: Reuters

Merkel and Putin call for ceasefire in Ukraine - Kremlin

German Chancellor Angela Merkel and Russian President Vladimir Putin, meeting briefly on Sunday before the World Cup soccer final in Brazil, called for a stepping-up of peace efforts in Ukraine, Putin's spokesman said.

The pair have been in regular telephone contact over the Ukraine crisis, with Merkel urging Putin to use his influence with pro-Russian separatists to help bring about an end to fighting in the east of the former Soviet republic in which hundreds of people have been killed.

Putin's spokesman Dmitry Peskov said Merkel and the Kremlin leader agreed the situation 'has a tendency towards degradation'.

"Both Putin and Merkel stressed the necessity to urgently resume the work of a contact group on Ukraine, possibly in the format of a video conference. It is their common opinion that, in order for the contact group to resume its work, a ceasefire needs to be declared as soon as possible," Peskov said.

A separate statement released by Merkel's office said effective controls along Russia's border with Ukraine and an exchange of prisoners were key prerequisites for a ceasefire.



Source: Reuters

Oil near 3-month low around $107 as supply fears ease

 Brent crude oil steadied around $107 a barrel on Monday, close to its lowest in three months after weeks of heavy falls on signs of improving supply from key producers and continued weak demand.

The North Sea benchmark peaked above $115 last month as an Islamist insurgency swept across western Iraq, taking control of large parts of the oil-producing country including its biggest refinery.

The insurgency now holds large swathes of Iraq but is hundreds of kilometres from the country's main oil-producing and exporting centres in the south and the fighting has had little impact on oil supplies.

Meanwhile, oil output in Libya has increased in the last few weeks and extra supplies of its high-quality, light crude are expected to start flowing to markets soon, traders say.

"The key drivers now are the possible return of significant flows from Libya, as well as weak physical markets," said Michael Wittner, oil analyst at French bank Societe Generale.

Brent crude was up 30 cents at $106.96 by 1345 GMT after dropping to $106.21, its lowest since April.

U.S. crude futures fell 30 cents to $100.53 a barrel. The U.S. benchmark lost $2.10 on Friday to close at $100.83, its lowest settlement since May 12.

"We had a steep sell off on Friday and it was a very high volume which probably shows that there was a lot of liquidation by people who bought higher up," said Christopher Bellew, a broker at Jefferies Bache in London.

Global crude oil markets are fairly well supplied, traders and analysts say, and profit margins for refiners in several regions have fallen sharply, reducing demand for crude.

This weakness has been reflected in the price structure of the Brent futures market, as contracts for prompt oil have fallen to significant discounts below later contracts.

"Crude demand is soft, because product demand is weak, which is reflected in mediocre refining margins in Europe and Asia, and some erosion in the United States," Wittner said.

Fighting broke out between rival militias vying for control of Libya's main airport on Sunday, killing at least seven people and halting all flights in the worst violence in the capital for six months.

But Libya's oil output has continued to rise and has now reached 470,000 barrels per day (bpd), a spokesman for the state-run National Oil Corp said.

Libya has an oil production capacity of well over 1 million bpd and could increase output significantly if the government establishes control over key facilities.

But the possibility of further export disruption in Libya as well as the continuing uncertainty of nuclear talks with Iran could push up oil prices, said Bellew.

Investors kept an eye on talks between Iran and the big world powers over Tehran's nuclear programme.

Iran's oil supplies have been restricted by sanctions for several years and agreement at the talks in Vienna could lead to a softening or lifting of those limits.

Negotiators have been set a July 20 deadline for a deal but diplomats say the two sides are deeply divided and assume the talks will be given another six months to seek a deal.

U.S. Secretary of State John Kerry will meet his Iranian counterpart, Javad Zarif, for a second day in a row on Monday, a U.S. official said.
Source: Reuters