WSJ: The Markets According to Goldman Sachs

According to the GS economists, “the picture of underlying recovery is one of steadier healing than the GDP growth numbers show.” They note that payrolls data are robust, and expect that to continue. Housing data, “the most troubling soft spot in the last six months”, has also begun to improve – albeit tentatively.

Growth without inflation pressure

They still see more slack in the labor market.  Although the unemployment rate itself has continued to fall more rapidly than expected, they say that the stability of wage growth measures at low levels continues to indicate that there is little sign of tightness in the broad labor market yet.  “Despite the shift to above-trend growth in the US, we continue to think that inflation will only rise gradually towards the Fed’s 2% target,” they write.

Later but steeper

They have pulled their forecasted date for the Federal Reserve’s first rate hike to the third quarter of 2015 from the first quarter of 2016. Even though this is later than market consensus, though, they say that once tightening begins the pace of hiking is “likely to be steeper than the market currently expects”.
Lasting High Valuations

They note that, on an absolute basis, many U.S. valuations are above their long-term averages, in some cases by a substantial margin. If you compare equities to bonds though, valuation measures still look quite favorable, they say. “Both theory and evidence support the notion that the required return on equities should vary with the macro environment. And in a world where real bond yields are lower for longer than normal, we think equity valuations are likely to remain at levels that feel uncomfortable to many investors, and could move higher still,” they write.

Volatility staying low

They dismiss the idea that low levels of volatility represent an anomaly, arguing instead that it is a symptom of the current macro conditions. “As capacity constraints emerge, volatility will pick up as in past cycles,” they write. “But given our view that this point is still some way off, we think a shift in the volatility landscape is premature.”

EM Growth Slows But Relief In China

Better-than-expected performance in emerging assets, seen during the first half of the year, will be harder to repeat in the second half, they say. “With renewed compression in the risk premium in much of the higher-yielding parts of EM, we see renewed vulnerability here.” They do, however, expect China’s economy to improve over the next two to three months.

Eyes on Japan

The focus has shifted away from Japan somewhat in the light of disappointing asset performance. Goldman Sachs predicts, however, that the second half of the year has a better chance of bringing fresh focus. “As the recent inflation acceleration peaks and recedes, pressure on the Bank of Japan to take fresh action is likely to resume,” they write.

Easy on Europe

Finally, they note that rewards for risk in the euro area are substantially lower than at the start of the year. They cite a limited potential for more sovereign risk premium compression, as well as the euro area rate curve already being flat.  They do admit that European valuations – in both credit and equities – still offer some premium to other markets, but it is still “easier to conceive tail risk in the Euro area than in the other major economies.”

NY Times : Malaysia Jet Brought down in Ukraine by Missile U.S. Officials Say

WASHINGTON — A Malaysia Airlines Boeing 777 with 295 people aboard was shot down on Thursday by a surface-to-air missile, American officials have confirmed. The plane was traveling at about 30,000 feet, according to tracking information from a military spy satellite. The satellite was unable to detect where exactly the missile was fired.

Military and intelligence analysts are using mathematical formulas, high-speed computers and other sensors to try to pin down the missile’s point of origin. Other analysts will work with the Ukrainian authorities to recover and analyze pieces of the missile and the aircraft to help determine what kind of missile was fired, the officials said.

The plane — Malaysia Airlines Flight 17, en route from Amsterdam to Kuala Lumpur, Malaysia — was carrying nearly 300 passengers and crew when it crashed and burned in an eastern Ukraine wheat field near the Russian border, in an area roiled by fighting between pro-Russian separatists and Ukrainian forces. There were no known survivors. Ukrainian officials immediately called the crash an act of terrorism.

The furiously unfolding investigation centered on Ukrainian separatists or Russian troops as the missile operators. But the reason for the attack — whether it was a deliberate strike or a tragic accident — was unknown.

“What we still don’t know is what were they thinking,” one official said.

“This is truly a grave situation,” said Vice President Joseph R. Biden Jr. of the United States, speaking in Detroit. “It’s important we get to the bottom of this sooner than later because of the possible repercussions that can flow beyond from this, beyond the tragic loss of life.”

Ukraine’s president, Petro O. Poroshenko, called for an immediate investigation and asked the Dutch prime minister, Mark Rutte, to send Dutch experts to assist. “I would like to note that we are calling this not an incident, not a catastrophe, but a terrorist act,” Mr. Poroshenko said.

Malaysia’s prime minister, Najib Razak, said, “If it transpires that the plane was, indeed, shot down, we insist that the perpetrators must be brought to justice.”

Forensics evidence from the site, as well as the satellite data and any intercepted communications, would help analysts and investigators determine who fired the lethal missile.

Defense Department officials said late Thursday that they were examining the possibility that Ukrainian separatists with Russian advisers had fired a captured Ukrainian Army Buk missile system. The separatists do not otherwise have the technology to shoot down an airliner at such a high altitude, the officials said.

Another possibility, a senior Pentagon official said, was that Russian troops just across the border from eastern Ukraine may have fired the missile. In both scenarios, the senior official said, the missile operator most likely mistook the Malaysian airliner for a Ukrainian military transport plane. A third possibility, the official said, was that the Russians supplied the rebels with the missile.

Two senior Pentagon officials said military analysts suspected that the missile was either an SA-11 or an SA-20.

Reporters arriving at the scene near the town of Grabovo described dozens of lifeless bodies strewn about, mostly intact, in

WSJ Survey: Economists Dim Their U.S. Growth Views

   The U.S. economy in 2014 is likely to record another disappointing year of growth, according to the latest Wall Street Journal survey of economists.

The main culprit cited by the 48 surveyed economists—not all of whom answered every question—is the absence of a big spring bounce following the winter's sharp contraction.

The July consensus view calls for inflation-adjusted gross domestic product to grow just 1.6% this year, measured as the percentage change from this year's fourth quarter over the fourth quarter of 2013.

That would represent a steep drop from the 2.2% expected just a month ago, and is off more than a percentage point from the 2.7% and 2.8% estimates made in the first five months of 2014. Real GDP grew 2.6% over the four quarters of 2013.

Economists now estimate the first quarter's deep contraction—2.9% at a seasonally adjusted annual rate, according to the Commerce Department—was followed by a softer-than-expected rebound.

The forecasters now estimate real GDP grew at an annual rate of 3.1% in the second quarter, down from the 3.5% gain projected in last month's survey. The consensus view sees growth of about 3% in the second half.

"We were flat-lining in the first half," said Diane Swonk of Mesirow Financial. "We are in another difficult year, instead of the 'lift-off' year we expected."

Along with the downgraded GDP forecast, a new caution emerged in the July survey. When asked about an upside or downside risk to their forecasts, the respondents were evenly split. That's a sea change from the results of the six previous months. In each of those surveys, about 3 out of 4 economists thought the risk was that the economy would grow faster than their forecasts expected.

One problem has been the unexpected sluggishness of consumers. The survey panel estimates real consumer spending grew at a 2.2% pace in the second quarter. That's better than the 1% pace in the first quarter but slower than the average quarterly gain for 2013.

The housing sector has also proven to be a disappointment. The Commerce Department reported Thursday that housing starts in June unexpectedly fell 9.3% to an annual pace of 893,000, the weakest in nine months.

The economists in the survey now think housing starts will total only 1.035 million in 2014. That projection is down from the 1.11 million forecast in January. In the panel's view, housing weakness is the second-biggest downside risk to 2014 growth, after possible negative international events.

Even now, global demand isn't as strong as U.S. spending. As a result, the trade deficit isn't narrowing as many forecasters expected earlier. The net export sector subtracted more than 1.5 percentage points from first-quarter GDP growth. The consensus view now estimates the deficit widened further in the second quarter, which will cut into top-line GDP again.

"Exports are growing but not strongly," said Allen Sinai of Decision Economics, "and more imports worsen net exports."

Slower growth, however, doesn't mean a weaker labor market. The average forecast expects nonfarm payrolls to increase by about 212,000 jobs per month in 2014. That would be the fastest hiring pace since 1999.

WSJ: U.S. Stocks tumble to session lows on Ukraine's plane crash

"U.S. stocks tumbled on Thursday after a Malaysia Airlines passenger jet crash near the Russia-Ukraine border rekindled worries about fighting in the region.

Stocks slid to session lows and safe-haven assets such as gold and Treasury-bond prices rose. Investors often buy gold and low-risk bonds to hedge riskier investments during times of political or economic instability.

The Dow Jones Industrial Average fell 124 points, or 0.7%, to 17013, near the day's lows in late-afternoon trading. Losses put the blue-chip benchmark on pace to snap a four-session streak of gains.

The S&P 500 shed 15 points, or 0.8%, to 1966 and the Nasdaq Composite Index gave up 44 points, or 1%, to 4382. Declines were broad, as all 10 of the S&P 500's sectors lost ground, led lower by industrial and energy stocks.

The yield on benchmark 10-year U.S. Treasury notes fell to 2.472%, near the day's lows, down from 2.549% late Wednesday. Bond prices move in the opposite direction as yields. Gold futures rose 1.3% to settle at $1,316.70 a troy ounce. Crude-oil futures added 1.9% to $103.13 a barrel.

Thursday's declines provided a jolt to investors who in recent weeks had grown accustomed to steady gains in mostly placid trading. The Dow notched its 15th record high of the year on Wednesday, capping a steady stretch of gains that coincided with signs of an improving U.S. economy and pledges from the Federal Reserve to keep interest rates low for an extended period."

Russian jets shoot down Ukrainian warplane over Ukraine - Kiev military

 Russian jets shot down a Ukrainian SU-25 fighter plane that was on military operations over the east of Ukraine, where government forces are fighting to quell a pro-Russian separatist rebellion, the Ukrainian military said on Thursday.

It was the first time Ukraine had directly accused Russia of using air power in the war. In a previous attack on a military transporter, which it said was launched from Russia, Kiev was unable to specify whether it came from landbased missiles or airborne.

Russia's defence ministry declined to comment on Thursday's accusation by Kiev.

The Ukrainian Defence Ministry said the plane was brought down on Wednesday night near Amvrosiyivka, about 15 km (about 9 milles) from the border with Russia, by rockets which hit it in the tail as it wheeled away from the border.

"It is likely that this was carried out by air-to-air rockets from the Russian airforce which were patrolling the border in a pair," the ministry said in a statement on its website.

The pilot safely ejected, Andriy Lysenko, a spokesman for the National Defence and Security Council, told journalists.

The downing of the SU-25 came against a background of increasingly strident charges of direct Russian involvement in the three and a half month conflict in which the pro-Western government in Kiev is fighting to put down a rebellion by separatists who want a future in Russia.

Moscow denies orchestrating the rebellion. But Western governments accuse it of failing to do enough to help curb the violence. U.S. President Barack Obama imposed sanctions on Wednesday on some of Russia's biggest companies, limiting their access to funding.


"VERY TOUGH"

"The situation on the border in the zone of the

'anti-terrorist operation' is still very tough. Grad missile systems, heavy artillery and mortar is continually being used. The firing on the border posts and (government) forces is often coming from the territory of the Russian Federation," Lysenko said.

Five Ukrainian servicemen had been killed in the past 24 hours, he said. This would bring to more than 270 the number killed since the government launched an "anti-terrorist" operation in April to crush the rebels.

Hundreds of civilians and rebels have also been killed.

Ukrainian positions had come under fire from artillery from the Russian border settlement of Kuybyshevo, Lysenko said, adding that more and more Russian units were coming up to the border with Ukraine.

A Ukrainian paratroop tactical group deployed at Dmytrivka in particular had come under heavy fire from the Russian side, he said.

In the past 24 hours, the separatists had carried out 27 attacks on army checkpoints and positions of government forces, Lysenko said.

Attack planes are one of the Ukrainian military's most effective weapons for inflicting heavy losses on concentrations of rebels and military equipment which Kiev says is being brought in from Russia to fortify rebel positions.

The shooting down of the SU-25 was the third reported incident this week in which a Ukrainian plane has been hit by a missile.

Kiev has said that an An-26 military transporter was brought down last Monday probably by a missile fired from Russia, either from the air or from the ground. Two out of the eight people on board that plane were killed, the Ukrainian military said.

On Wednesday, another SU-25 was hit by a rebel missile but the pilot landed the plane successfully with relatively slight damage. Kiev did not allege Russian involvement in that case.

The rebellions erupted in Ukraine's Russian-speaking eastern regions after months of pro-Europe protests drove out a Moscow-backed president. Russia subsequently annexed Ukraine's Crimea, sparking the biggest Russia-West crisis since the end of the Cold War.

Ukrainian President Petro Poroshenko refused to renew a 10-day unilateral ceasefire by government forces on June 30, saying it had been repeatedly breached by the separatists and had cost Ukrainian lives. Efforts to forge another more effective truce have failed.

Source: Reuters

Slim isn't the only picking to play Mexican oil

Investing with Carlos Slim is just one way to bet on Mexico's oil revival. Ending the state's crude monopoly promises a surge in energy drilling and output. That won't much move the stock of incoming giants like Exxon Mobil . But it could meaningfully boost Carlos Slim's Grupo Carso , which owns a stable of drillers and services firms; along with local talent like Alfa and Grupo Mexico .

Mexico's inefficient, state-run Pemex  will soon be joined by a host of more motivated and technologically advanced rivals. On Tuesday, committees in the Mexican Senate approved laws that will allow private firms to explore for crude for the first time since 1938. After a decade of sliding production, Mexican officials believe the overhaul will lead to a 20 percent rise in output by 2018 and an extra $30 billion in annual foreign direct investment.

Riding this wave as an equity investor, however, isn't simple. Even the discovery of big new fields in Mexico won't shift the needle for Exxon or Chevron . Daily output of oil and gas at Exxon is already some 44 percent larger than Mexico's entire crude production.

Slim's $13 billion Grupo Carso is one pick. Mexico's richest man is still a relative novice in energy and is unlikely to bid alone for complex deepwater or shale projects. That said, Carso has been expanding its oil expertise. A drilling boom would benefit the group's platform builder Swecomex - especially since the new rules insist that a quarter of supplies be sourced inside Mexico. And driller Carso Energy would make a tempting local partner for outsiders needing help negotiating Mexico's political process.

Another possible homegrown champion is Alfa, a $15 billion conglomerate, which has experience in shale drilling in the United States. Mining firm Grupo Mexico, with a market capitalization of $27 billion, has also been venturing into oil drilling and would be a natural partner for foreign explorers.

True, none of these firms offers a pure play on energy. Carso gets less than a quarter of its income from drilling and oil services. And Alfa produces everything from frozen foods to auto parts. But all now have a powerful incentive to beef up their energy businesses. And as they grow, with a little nudging from shareholders they might be spun off in the future.

Source: Reuters

Ukraine's President and Prime Minister didn't immediately assign blame of Malaysia Airlines Plane Crash

The WSJ reports,"Ukraine's president and prime minister didn't immediately assign blame for the incident.

Prime Minister Arseniy Yatsenyuk ordered a special investigation into the crash, as well as the downing of a Ukrainian AN-26 military cargo aircraft and a Ukrainian SU-25 fighter jet in the same area earlier this week.

"This is the third tragic incident in recent days after the AN-26 and SU-25 were shot down," Ukrainian President Petro Poroshenko said in a statement. "We can't rule out that this plane was also shot down, but we underscore that the Ukrainian armed forces were not carrying out any actions to strike airborne targets."

If a passenger jet was shot down over Ukraine, attackers would have had to use a sophisticated surface-to-air missile system, not the shoulder-fired weapons that are more accessible and easier to use.

Those weapons, nicknamed manpads, have been used in attacks against commercial aircraft in the past. But their range is much lower than the 30,000-feet cruising altitude.

Mr. Porosheno expressed condolences to the relatives of those killed in the accident and said Ukrainian authorities were engaging in all possible rescue efforts.

Russian President Vladimir Putin expressed his sympathies to the Prime Minister of Malaysia for the crash over Ukrainian airspace, according to a statement published on the Kremlin's website. "The Russian head of state asked to convey his most sincere words of sympathy and support to the families and friends of the victims," the Kremlin said.

In 2001, the Ukrainian military mistakenly shot down a commercial passenger jet that was en route from Tel Aviv to Novosibirsk with a land-to-air missile that was fired during a military exercise. All the 66 passengers and 12 crew members on board the plane were killed in the blast.

In Malaysia, Prime Minister Najib Razak expressed shock and said the country was launching an immediate investigation into the incident".

Ukraine: War of Words . Official Says Malaysia Airlines Plane Shot Down Over Donetsk

      The WSJ reports "An adviser to Ukraine's Interior Ministry said a Malaysia Airlines passenger plane carrying more than 200 people was shot down Thursday while flying over the east Ukraine region of Donetsk.

Malaysia Airlines confirmed it had lost contact with Flight MH17 and its last known position was over Ukrainian airspace.

Malaysia Airlines Flight 17 departed from Amsterdam around noon on Thursday and was due to arrive in Kuala Lumpur early Friday.

The plane was shot down near the city of Torez in the Donetsk region while flying at a height of about 10,000 meters, according to Anton Gerashchenko, an adviser to Ukraine's Interior Ministry.

The crash immediately sparked speculation about the cause amid fighting between Ukrainian and pro-Russia separatists. Several other planes have been downed in recent days.

Also fueling speculation is the fact that it involved Malaysia Airlines, the operator at the center of a global mystery over the disappearance of its flight in March.

The war of words kicked off immediately after the crash. In a phone call with The Wall Street Journal, Mr. Gerashchenko alleged that pro-Russia rebels had set up a ground-to-missile battery near the Russian border by the town of Snizhne.

"They clearly thought that it was a military transport plane that they were shooting at," he said. "They were the ones who did this."

His claims couldn't be verified. Klavdia Kulbatskaya, a spokeswoman for the rebel-proclaimed Donetsk People's Republic, said she had no information on the incident.

In 2001, the Ukrainian military mistakenly shot down a commercial passenger jet that was en route from Tel Aviv to Novosibirsk with a land-to-air missile that was fired during a military exercise. All the 66 passengers and 12 crew members on board the plane were killed in the blast".

Ukraine says Malaysian airliner shot down, 295 dead

 A Malaysian airliner was shot down over eastern Ukraine by militants on Thursday, killing all 295 people aboard, a Ukrainian interior ministry official was quoted as saying by Interfax-Ukraine news agency.

The aircraft, which other sources said was a Boeing 777 flying from Amsterdam to Kuala Lumpur, came down near the city of Donetsk, stronghold of pro-Russian rebels, Anton Gerashchenko said, adding that it was hit by a ground-to-air missile.

There was no further confirmation of the report, although Ukrainian officials said local residents had found wreckage.

Malaysia Airlines said on its Twitter feed it had lost contact with its flight MH-17 from Amsterdam. "The last known position was over Ukrainian airspace," it said.

Gerashchenko was quoted as saying: "A civilian airliner travelling from Amsterdam to Kuala Lumpur has just been shot down by a Buk anti-aircraft system ... 280 passengers and 15 crew have been killed."

Interfax-Ukraine quoted another Ukrainian official as saying the plane disappeared from radar when it was flying at 10,000 metres (33,000 feet), a typical cruising altitude for airliners.

It came down at Torez, near Shakhtersk, some 40 km (25 miles) from the Russia border. The area has been the scene of fighting between Ukrainian troops and pro-Russian rebels.

Ukraine has accused Russia of taking an active role in the four-month-old conflict in recent days and accused it earlier on Thursday of shooting down a Ukrainian fighter jet - an accusation that Moscow denied.

Source: Reuters

Iraqi Kurdistan starts oil pumping from Kirkuk -Iraqi official

Iraq's autonomous Kurdish region has begun to pump oil from Kirkuk fields previously controlled by Iraq's central government into the pipeline system that runs in its own territory, a senior Iraqi oil official said on Thursday.

Kirkuk lies on the disputed boundary between the northern Kurdish region and the rest of Iraq and is at the heart of a long-running dispute between Baghdad and Arbil, the Kurdish regional capital, over territory and natural resources.

Kurdish forces took control of production facilities at the Kirkuk and Bai Hassan northern fields on July 11, exploiting a power vacuum created by an Iraqi military withdrawal in the face of an Islamist insurgent offensive. 

The Iraqi official told Reuters by telephone from Baghdad the Kurdish region had started to pump crude from one of the Kirkuk domes to the Khurmala dome, out of which the Kurdish pipeline runs, using an existing connection.

"They are using a pipeline which was originally used to send crude from (Kurdistan), but they have now reversed it (to use it by the Kurdish region)," the official said, estimating the quantity at around 20,000-25,000 barrels of oil per day.

The Kurdish Ministry of Natural Resources could not immediately be reached for comment.

Kirkuk's Baba and Avana geological formations were previously administered by Baghdad before the July 11 takeover. The Kirkuk region's third formation, Khurmala, has long been under the control of the Kurdistan Regional Government (KRG).

Kurdish forces took control of Kirkuk a month ago, making good on a longtime territorial claim to the city, after Iraqi troops left in the face of a lightning assault by Islamic State insurgents, who have seized large parts of northern and western Iraq, but not threatened well-defended Iraqi Kurdistan.

The Kirkuk and Bai Hassan oilfields have a combined production capacity of 450,000 bpd but have not been producing significant volumes since March, when Iraq's Kirkuk-Ceyhan export pipeline was sabotaged by Islamist militants.

Last year, Baghdad signed a deal for BP BP.L to revive the Kirkuk oilfield, a plan that the KRG has rejected as illegal.

Source: Reuters

Vladimir Putin condemns US sanctions against Russia

Russian president Vladimir Putin warns on Wednesday that US sanctions will take relations with Russia to a 'dead end' and damage US business interests in his country. The latest US sanctions target two major energy firms, a pair of powerful financial institutions, eight weapons firms and four individuals. They are intended to end the insurgency in eastern Ukraine that is widely believed to be backed by the Kremlin.

Source: theguardian

WSJ: Alibaba Plans IPO for After Labor Day

"Alibaba Group Holding Ltd. is now planning to launch its initial public offering after the U.S. Labor Day holiday on Sept. 1, according to a person familiar with the company.

Alibaba has been working on a potentially $20 billion initial public offering for this summer, and it had been considering launching the deal as soon as the end of this month.

But the company didn't want to rush to complete its pre-IPO work and risk launching the deal in August when the IPO market slows, the person said.

The [IPO] "process is right on track. It's more important to get it right than to get it fast," this person said".

U.S. Housing Starts Sink 9.3%, Driven by Record Drop in the South

       The U.S. home construction tumbled in June, a surprising sign of weakness for a sector that has struggled to maintain momentum over the past year.

Housing starts sank 9.3% last month to a seasonally adjusted annual pace of 893,000, the weakest showing since September 2013, the Commerce Department said Thursday.

It was the second-straight monthly drop and was driven by a nearly 30% decline in the South, the largest monthly decrease on record for that part of the country. Other parts of the U.S., however, posted increases.

Though the report was a disappointment overall, there were a few silver linings. For the entire second quarter, construction of single-family homes was up 4% from a year ago, compared with a 2% yearly decline for the first three months of the year. Permits for single-family homes were up 2.6% from the prior month and housing starts were up 7.5% from a year earlier.

National builder Lennar Corp. said during its quarterly call with investors last month that a pickup in construction for single-family homes will depend on whether mortgage lenders relax their standards. But rival KB Home said during its quarterly call that it has seen encouraging signs, such as the return of first-time buyers in certain markets with strong job growth.

Home building surged in 2012 and the early part of last year, but was thrown off track by rising mortgage rates and increasing home prices. Construction nearly touched postrecession highs in April, but turned downward the following month.

Despite the report, several recent signs have pointed to the housing market regaining its footing. Sales of previously owned homes, the broadest measure of housing demand, rose in May to the highest level since October, and sales of newly built homes that month rose to the highest level in six years.

Both housing starts and permits were weaker in June than expected. Economists surveyed by The Wall Street Journal had projected starts would rise to a pace of 1.015 million in June, and expected permits would increase to a pace of 1.040 million.

The decline in construction was driven by a 9% drop in single-family homes and a nearly 10% drop in apartments and condominiums homes with at least two units.

Economists generally believe home building will pick up this year from the 930,000 units built last year and make a modest contribution to economic growth.

Source: Reuters

U.S. sanctions set to slow Rosneft's dollar debt, not oil deals

 President Barack Obama aimed a direct blow at Russia's economic heart on Wednesday with sanctions on Rosneft , the flagship oil giant that generates more than 4 percent of the world's crude and over 8 percent of the country's GDP.

But in a change of tack from previous similar efforts, the measures were narrowly tailored to slowly starve the state-run energy firm of U.S. dollar funding, not bar it from doing business with oil buyers such as BP or stymie multibillion-dollar ventures with firms like ExxonMobil , experts say.

The sanctions against key parts of the Russian energy and financial industry were intended to serve notice to Moscow that its refusal to curb violence in eastern Ukraine has consequences.

In announcing the sanctions, which also hit No. 2 natural gas producer Novatek as well as two banks and eight defense firms, the Treasury Department said U.S. companies were only prohibited from engaging in any "new debt of longer than 90 days maturity or new equity" with the energy firms and banks.

The measures would not freeze the Russian firms' assets "nor prohibit transactions with them beyond these specific restrictions," the Treasury Department said. That marked a change from many earlier measures that effectively shut down a sanctioned firm's ability to do any business with U.S. entities.

The result is likely to be an increase in the cost of financing for Rosneft, which has grown increasingly reliant on pre-financing oil supply deals with firms including Glencore and BP. It may need to seek out new banks for loans, and could eventually slow investment in new projects.

But it will not "directly affect or limit Russia’s oil exports the way that sanctions on Iran were designed to do," said Gary Hufbauer, expert on economic sanctions at the Peterson Institute for International Economics in Washington, DC.

Washington has long barred U.S. companies from investing in Iran, and more recently has imposed sanctions that have halved its oil exports over Tehran's nuclear program.

"The U.S. is scaling its sanctions to have a slow increase in pressure on Russia," Hufbauer said.

To be sure, Wednesday's sanctions will intensify the tension between the West and Moscow over Russia's role in Ukraine, and therefore add to broad geopolitical unease across the oil sector. The impact on a deal to buy Morgan Stanley's physical oil trading business, which is now pending before the U.S. foreign investment approval committee, is not clear.

Yet the immediate effect may be less dramatic than in March, when Obama's first major sanctions sparked a brief wave of panic among energy traders who feared they may be cut off from key counterparties such as global commodity merchant Gunvor, whose founder and then co-owner Gennady Timchenko was targeted.

Washington added Rosneft's chief executive Igor Sechin to the sanctions list a month later.

The latest sanctions "could have been a lot worse," Douglas Jacobson, an attorney at Jacobson Burton in Washington and sanctions expert. "The sectoral sanctions list is extremely narrow in terms of parties and what it prohibits."

Obama told reporters the measures were "significant" but also "designed to have the maximum impact on Russia while limiting any spillover effects on American companies or those of our allies".


FUNDING SQUEEZE

Thus far, Washington’s sanctions have had only a limited impact on the Russian energy industry, a cornerstone of the country's $2-trillion economy, resulting mostly in higher borrowing costs for domestic companies.

Even as the pressure has mounted over recent months, executives from Total , BP, Statoil and ExxonMobil have all visited Russia, underlining the importance they attach to business with the world's leading oil producer with current output of around 10.5 million barrels per day

(bpd). Rosneft alone pumps about 40 percent of that.

Experts said that Rosneft's business partners would not likely be in danger of falling foul of the sanctions.

The latest effort "will limit the sources from which Rosneft can get financing and thus raise the cost of capital for the firm," according to Jason Bordoff, director of the Center on Global Energy Policy at Columbia University and a senior White House energy adviser until late 2012.

"It does not prohibit U.S. firms from doing business with Rosneft or bar Russian energy supplies from flowing into the global market."

Sechin, speaking at a BRICs meeting in Brasilia, said the sanctions would not affect Rosneft's current project with ExxonMobil , but would damage the shareholders of U.S. companies cooperating with Rosneft.

Exxon has a $10 billion joint venture with Rosneft off the Pacific island of Sakhalin producing over 100,000 bpd. A spokesman for the company declined to comment.

A spokesman for BP, which has a 20 percent stake in Rosneft and a number of large joint exploration projects, said the company was considering implications of the new sanctions, but had no additional comment at this point.

A spokesperson for Schlumberger NV , which drills with Rosneft on the Russian island of Sakhalin, was not immediately available to comment.

Chevron has a stake in a Russian pipeline and last fall inked a $10 billion deal to develop Ukrainian shale.

"We are reviewing the sanctions to ensure strict compliance with the law and we continue to monitor events," Chevron spokesman Kent Robertson said.

Source: Reuters

U.S. over-reaches with sanctions on Russian energy firms

Targeting major Russian energy firms may come to be seen as the turning point at which U.S. sanctions policy over-reached and spurred a major effort to re-route financial transactions away from the United States.

Prohibiting core Russian energy companies such as Rosneft, Gazprombank, Novatek and Vnesheconombank from arranging equity or long-term debt finance from or through “U.S. persons” marks a major escalation in the sanctions battle between the United States and its European allies on the one hand and the Russian Federation on the other.

But sanctions will remain useful only if they are employed sparingly. Their utility is in danger of being blunted through over-use.

Like any other weapon, if sanctions are used too often, opponents will develop countermeasures.

The calculus is simple: sanctions will remain effective only as long as the cost of complying with them is lower than the cost of developing ways to circumvent them.

Compliance and circumvention costs are directly related to the frequency with which sanctions are imposed.

If sanctions are used rarely, the cost of complying with them is low, and it is generally not worth expending significant resources to develop ways to circumvent them.

But as sanctions are used more frequently, compliance costs rise, and the incentive to spend time and effort to avoid them becomes greater.

To maximise the disruption and inconvenience associated with sanctions, their use must be occasional. Once sanctions become the norm, the financial system will adapt to work around them.

Over-use of sanctions threatens to spur a shift away from using financial institutions and networks that fall under the jurisdiction of the United States.


PENALTIES PROLIFERATE

Russia’s energy firms join a long list of foreign corporations, banks, individuals and even countries that have recently fallen afoul of U.S. policy and law.

In addition to sanctions imposed on individuals suspected of involvement in narcotics trafficking, terrorism and weapons of mass destruction, the United States is enforcing comprehensive financial sanctions on Syria, Iran, Cuba and North Korea.

Sanctions have also been imposed in relation to Belarus, the Central African Republic, Ivory Coast, Democratic Republic of Congo, Iraq, Lebanon, Myanmar, Somalia, Sudan, Yemen and Zimbabwe, according to the U.S. Treasury’s website.

The United States is also enforcing secondary sanctions

(penalties on firms accused of helping others evade sanctions) on entities in China, Cyprus, Georgia, Liechtenstein, Switzerland, Ukraine and the United Arab Emirates.

Even before the crisis over Ukraine, Russian entities had been targeted with sanctions over the death in custody of accountant Sergei Magnitsky.

There are now literally thousands of individuals and companies on the various sanctions lists drawn up and enforced by the U.S. Treasury’s Office of Foreign Assets Control (OFAC).

Other banks and corporations that have had cause to rue their financial involvement with the United States include Argentina (locked in a dispute with U.S. courts over defaulted debt), France (which has found BNP Paribas, one of its largest banks, fined $9 billion for sanctions-related transactions), and Switzerland (where some banks have been refusing to open accounts for U.S. citizens and anyone connected with the United States owing to concerns about tax evasion penalties).
Source: Reuters

Indonesia threatens to hand over Newmont mine if output stays shut

Newmont Mining risks its Indonesian mining licence being taken over by a state-owned firm if the U.S. miner does not resume copper production, the Southeast Asian nation warned, escalating a six-month dispute over export rules.

The move represents a hardening of the stance of Indonesia's outgoing government. The mining ministry earlier this week said it could terminate Newmont's mining contract in response to the miner stopping production and filing legal arbitration over the export rules.

The developments mark the latest twist in the dispute between Indonesia and U.S. miners Newmont and Freeport-McMoRan Inc that has led to a halt in copper concentrate shipments from Southeast Asia's biggest economy.

Indonesia plans to soon send a letter to Newmont saying that the company has defaulted on its contract, said Sukhyar, director general of coal and minerals at the mining ministry.

"The default is due to the stopping of production, so we can say they are negligent," Sukhyar told reporters on Thursday.

Newmont was not immediately available for comment.

The company and Freeport are in dispute with the government over an escalating export tax imposed in January that they say conflicts with their mining contracts. The tax is part of a government drive to force miners to build smelters and processing plants in Indonesia.

Newmont declared force majeure on shipments last month and said it had to halt production at its Batu Hijau copper mine because it did not have an export permit and its storage facilities were at full capacity.

Before the new export rules, Colorado-based Newmont forecast copper concentrate output for 2014 at its Indonesian mine at 110,000-125,000 tonnes. But that is unlikely to be met, and thousands of its employees have been placed on leave at reduced pay.

Experts said the company would have a good case against the government in international court.

"On the basis of the facts as I know it, Newmont would almost certainly win," said Jakarta-based foreign advocate Bill Sullivan.

If the government terminates Newmont's contract, the mining ministry said it would first offer the Batu Hijau mine to Aneka Tambang (Antam) .

"The procedure is this mining site will be given back to the government," Sukhyar said. "First, the government will offer it to a state-owned enterprise, then a local-government owned enterprise, and then private."

Antam Corporate Secretary Tri Hartono said it would be ready to accept Newmont's mine if offered by the government, which holds a 65 percent stake in the Indonesian miner.


PREPARING FOR A FIGHT

President Susilo Bambang Yudhoyono on Thursday directed his chief economic minister Chairul Tanjung to start making preparations, including appointing a lawyer, to defend the government's case in international court.

"I heard today that Newmont will sit down with us ... but we must be ready. We do not want (Newmont) to be just buying time," Chairul told reporters.

The current government, which has been criticised by investors for its increasing nationalistic policies in the oil and mining sectors, has only three months left in office.

Indonesia's likely next president has signalled a more conciliatory approach to the contract dispute with Newmont. A senior party official of presidential front-runner Joko "Jokowi" Widodo told Reuters his government would seek negotiations with the miner.
Such a move by the new president could prove politically costly if he is seen to be backing down to a foreign company, experts said.

"If they had waited until the next government was in place, it might have been possible to solve this in a more amenable fashion," advocate Sullivan said.

"But now having started arbitration ... I think (the new government) will just say 'Hey, it'll be politically disastrous for us to be backing down in the face of Newmont's arbitration.'"

Congo copper output growth to slow in 2014 -mining chamber

 Growth in copper production in Democratic Republic of Congo will slow in 2014 from its rapid pace the previous year due to insufficient energy supply and uncertainty over new mining laws, Congo’s mining chamber said.

Copper production leapt to a record 914,631 tonnes last year from 620,000 tonnes in 2012 as new mining projects and expansion plans came online.

In a report on the first quarter of this year, the mining chamber predicted that copper output in 2014 would inch up to 922,000 tonnes, annual growth of just 0.82 percent compared with the 47 percent leap the year before.

“(Congo) still has the potential to produce over a million tonnes in 2014 and even more in following years, if it controls the parameters that influence investment, notably electricity supply and the revision of the mining code,” the report said.

The mining sector helped drive economic growth of 8.5 percent in Congo in 2013, which is forecast to rise further to 8.7 percent this year.

Congo possesses enormous reserves of gold, diamonds, copper, cobalt and tin, but the majority of its 65 million people live in poverty due to corruption, mismanagement and war.

International mining operations are drawn to Congo’s copper-rich Katanga province, but they have been hamstrung by a lack of reliable energy from dilapidated power sources and energy grids. Congo’s national energy company (SNEL) lacks the finances to overhaul its equipment.

“Demand (for electricity) has exceeded what can be delivered by SNEL since 2009, and with the exception of 2011, the gap has only grown, which is more than worrying,” the report said.

In a January letter, Prime Minister Augustin Matata Ponyo asked mining companies in Katanga to suspend expansion plans and respect energy rationing imposed by the government, in an effort to cope with the power deficit.

Companies have united, meanwhile, to oppose proposed changes to the mining code. Mining representatives are negotiating with the government over the proposed changes.

The government is seeking to increase royalties on mined material and to reduce stability clauses, a plan that the mining chamber has said will reduce foreign investment in the sector in the long term.

The report also highlighted an expected surge in industrial gold production from 6,149 kg in 2013 to 18,872 kg in 2014.

“The spectacular increase in industrial gold production is due to several projects coming online, which were in the construction phase,” the report said.

“It would have been difficult to launch these projects ... under a mining code with a heavy fiscal burden and a stability clause reduced to three years.”

Source: Reuters

China's MMG cuts zinc output forecast, says tight supply lifting prices

China's MMG Ltd  cut its 2014 zinc output target and said mounting supply concerns, heightened by the pending closure of its key Century mine in Australia, were driving world prices of the rust-inhibiting material higher.

The mine, one of world's biggest sources of zinc, is set to run dry next year, removing close to a half-million tonnes of the metal from the 13-million-tonne global market.

That has helped spark a rush among firms such as Glencore and Nyrstar to find new zinc deposits to feed rising demand from China which is buying the metal to rust-proof new cars and coat steel.

London Metal Exchange three-month zinc traded at its highest price in almost three years this week. Prices have climbed 20 percent since late March.

MMG, the Hong Kong-listed offshore arm of China's state-owned Minmetals Corp, cut on Thursday its 2014 output target to between 575,000 and 600,000 tonnes of zinc in concentrate from 600,000-625,000, following an underperforming second quarter at the Century mine.

The Century mine's second-quarter output was down 13 percent year-on-year to 110,891 tonnes. Nyrstar's refineries in Europe are the main buyers of zinc mined by MMG.

"What we are seeing now is a recognition that not only Century but a number of other mines are coming to an end," Andrew Michelmore, managing director of MMG, said in a conference call with media and analysts.

"Concentrate is going to get tighter and tighter."

MMG's Dugald River deposit in Australia is being assessed for future development, but at best will only partially replace lost output from the Century mine.

Canada's big Brunswick and Perseverance mines closed last year, eliminating a combined 335,000 tonnes of zinc, while ageing mines in Europe and Africa are also close to depletion.

Zinc is primarily used as an anti-corrosive in the galvanising process.

The global zinc market fell into a 194,000 tonne deficit in the five months to May 31, according to industry tracker International Lead and Zinc Study Group. That is more than 10 times the deficit recorded in the first 11 months of 2013.

Michelmore also watered down speculation it was circling fellow miner BHP Billiton's Australian nickel assets.

BHP has earmarked Nickel West for sale or spinoff to focus on production of iron ore and other commodities, triggering speculation MMG was among a handful of mining companies showing interest.

Rather than new acquisitions, MMG's immediate focus was on completing its $5.85 billion purchase of Peru's Las Bambas copper mining project from Glencore, Michelmore said. 

Source: Reuters

Brent rises above $108 on U.S. crude draw, Russia sanctions

- Brent oil rose above $108 a barrel on Thursday with a sharp drop in U.S. crude stockpiles boosting the demand outlook in the world's top oil consumer while tougher U.S. sanctions on Russia raised geopolitical concerns.

Continued worries about the political situation in Libya and Iraq also underpinned oil prices.

Brent for September , which became the front-month contract on Thursday, rose by $1 to $108.17 by 1247 GMT. The August contract, which expired on Wednesday, dropped 17 cents to settle at $105.85 a barrel.

U.S. crude known as WTI, which is sensitive to domestic inventory data, climbed $1.74 to near $103.

"There were stock draws in the United States, which is why WTI is up more than Brent. There is also the issue of Russian sanctions," said Christopher Bellew, trader at Jefferies Bache.

"But I'm not certain Brent will stay here too long because we are in a contango," he said, referring to a market structure where future prices are seen higher than the front month, encouraging traders to store volumes and wait for price rises.

Oil prices have been on the increase after data released on Wednesday showed a larger-than-expected drawdown in overall U.S. stockpiles and at the Cushing, Oklahoma delivery hub.

A rise in U.S. refining activity caused crude stocks to fall by 7.5 million barrels last week, the biggest draw since January and larger than the 2.1 million drawdown forecast by analysts, data from the U.S. Energy Information Administration showed.

At the same time, geopolitical tensions are on the rise over Ukraine, with the United States imposing sanctions on some of Russia's biggest firms for the first time, striking at the heart of President Vladimir Putin's power base.

Rosneft , Russia's largest oil producer, was among firms targeted by further U.S. sanctions announced on Wednesday while Europe agreed to impose its own package.

Source: Reuters 

Russian stocks drop as Putin hints at sanctions revenge

 Russian stocks and the ruble came under sharp pressure on Thursday, after the U.S. revealed fresh sanctions against the country over its failure to end the fighting in Ukraine, and as analysts fretted about increasing tension between the two nations.

The new sanctions, announced Wednesday, would bar Russian companies such as oil giant Rosneft  and Gazprombank OAO, the nation’s third-largest bank, from obtaining new financing from U.S. capital markets.

As the months-long Ukraine crisis returned to the foreground for investors, they began to back away from Russian stocks. The blue-chip MICEX index   tumbled nearly 3% to 1,433.61, its biggest fall in nearly a month. The index is now down over 4% for the week. Russian stocks were hit earlier this month, after a renewal of hostilities in Ukraine. The Market Vectors Russia ETFRSX -4.21%  lost 4% in premarket trade on Thursday, while the iShares MSCI Russia Capped ETF ERUS -4.25% shed 2%.

European stocks XX:SXXP -0.76% also came under pressure as Russia/Ukraine worries resurfaced. Not only is Europe closer to Russia, but many companies in the region carry out trade with Russian businesses. Analysts said European investor confidence has taken a knock on fears the sanctions could damage European economies. U.S. stock futures were coming under increasing pressure on Thursday, with Russia taking a portion of the blame.

Tensions also intensified after a spokesman for Ukraine’s Security Council accused a Russian jet of shooting down a Ukrainian SU-25 attack plane, which was on military operations over eastern Ukraine Wednesday night, media reports said. The pilot ejected safely from the plane.

 U.S. (additional) sanctions are significant and targeted, President Barack Obama said.

“Because Russia has failed to meet the basic standards of international conduct, we are acting today to open Russia’s financial services and energy sectors to sanctions and limit the access of two key Russian banks and two key energy firms to U.S. sources of financing, and to impose blocking sanctions against eight arms firms and a set of senior Russian officials,” said David S. Cohen, undersecretary for terrorism and financial intelligence, in a notice on the Treasury’s website.

While the measures won’t freeze the assets of those Russian firms, nor prohibit most transactions, those companies won’t be allowed to access U.S. equity or debt markets for new financing with a maturity beyond 90 days, Deutsche Bank analysts said in a strategy note .

Source: Marketwatch