Copper edges up, weak US job data calms worries about Fed

London copper was a tad firmer on Monday after weak U.S. employment data soothed concerns that the Federal Reserve would soon begin to draw back liquidity that has cushioned demand for metals.

Other metals such as LME zinc , lead and aluminium , which have constrained supply, attracted fresh investment to trade up by around half a percent on the London Metal Exchange, albeit in low volume.

"The reason why we cut back on our base metals holdings is that we felt a lot of good news is factored in, in terms of economic activity expected in China ... and also in the fourth quarter we expect momentum will slow again," said analyst Dominic Schnider at UBS Wealth Management in Singapore.

"We only hold metals where we have a little supply story to tell. On nickel, the ore availability is not there. We still target $25,000 by the end of the year," he added.

Three-month copper on the London Metal Exchange traded up 0.2 percent at $7,085 a tonne by 0230 GMT, after logging small losses in the previous session.

The most traded October copper contract on the Shanghai Futures Exchange was down 0.2 percent at 50,350 yuan ($8,200) a tonne.

U.S. job growth slowed a bit in July and the unemployment rate unexpectedly rose, pointing to slack in the labour market that could give the Federal Reserve room to keep interest rates low for a while.

Manufacturing activity in China and most of Asia gathered pace in July, while expansion slowed in Europe but remained healthy in the United States.

Hedge funds and money managers cut their bullish bets on copper futures and options in the week to July 29, the Commodity Futures Trading Commission said on Friday.
This week, Chinese trade data for July will be released and copper imports may be low again, BNP Paribas said in a note.

Trading houses have found it more difficult to get finance to store metal after suspected fraud at China's Qingdao port earlier this year.

As global banks and trading houses fire off lawsuits over their estimated $900 million exposure to the suspected metal financing fraud, the tangled legal battle to recoup losses is set to drag on for years and hinder any recovery in metal trade.

Among other metals, broker Triland said LME nickel's chart picture was deteriorating with a close on Friday below support at $18,500 a tonne and after it hit its 100 day moving average for the first time since a bull trend began earlier this year.

"It is a clear sign that nickel is unlikely to resume that uptrend in the near future and is indeed more likely to come under further selling pressure next week," it said.

China's stockpiles have dwindled this year after a ban on ore exports from Indonesia came into force in January. LME nickel traded flat at $18,400 a tonne on Monday.
Source: Reuters

US Crude Oil for September delivery dropped to US$ 97.71 on Monday

U.S. crude futures edged lower on Monday, trading near six-month lows reached in the previous session, as brisk supplies kept sentiment weak and stretched oil's losses from last month.

FUNDAMENTALS

* U.S. crude for September delivery <CLc1> dropped 17 cents to $97.71 a barrel by 0010 GMT. The contract fell as low as $97.09 on Friday, its weakest since early February, after losing nearly 7 percent in July.

* Brent oil <LCOc1> was down 14 cents at $104.70 a barrel.

* The front of the Brent futures price curve is trading at a heavy discount to later delivery barrels in a formation known as a contango. This discount has now lasted longer than any since early 2011, reflecting "weak physical demand and an oversupplied Atlantic Basin", Morgan Stanley analysts said.

* CVR Refining LP <CVRR.N> has said that its 115,000-barrel-per-day Coffeyville, Kansas, refinery could be down for four weeks after a July 29 fire in the facility's isomerization unit. The refinery is a big consumer of West Texas Intermediate crude

* U.S. job growth slowed in July and the unemployment rate unexpectedly rose, pointing to slack in the labor market that could give the Federal Reserve room to keep interest rates low for a while. Nonfarm payrolls increased 209,000 last month after surging by 298,000 in June. Economists had expected a 233,000 job gain. 

* An asphalt maker in New Jersey became the second U.S. company to publicly confirm buying Kurdish crude oil, saying on it had imported a cargo just weeks before an Iraqi lawsuit over a separate $100 million shipment offshore Texas.

* Growth in China's services sector slipped to a six-month low in July as new orders rose at their weakest rate in at least a year, data showed, taking some of the shine off an industry that has been a bright spot in the Chinese economy this year. 

MARKETS NEWS

* The U.S. dollar got off to a calm start this week, having suffered its biggest one-day fall in nearly a month after a batch of economic data led markets to push back expectations for the start of the Federal Reserve's rate-tightening cycle.

Source: Reuters

Asian shares pressured by Wall St, geopolitical tensions

 Steep weekly falls on Wall Street pressured Asian shares on Monday, as concerns over geopolitical tensions and Argentina's debt default eclipsed U.S. economic data that argued against an earlier start to the Federal Reserve's rate-tightening cycle.

Japan's Nikkei average <.N225> fell 0.4 percent while MSCI's broadest index of Asia-Pacific shares outside Japan  was off 0.05 percent.

Investors were cautious after the U.S. S&P 500 <.SPX> lost 2.7 percent last week, its biggest weekly decline since the week ending June 1, 2012, hitting two-month lows.

European shares <.FTEU3>, which have been weighed down for months on concerns over U.S. fines on some of the major European banks as well as problems at the biggest bank in Portugal, fell to 4 1/2-month lows on Friday.

Portugal announced on Sunday a plan to spend 4.9 billion euros ($6.58 billion) to rescue Banco Espirito Santo -- a setback for the country just months after it emerged from a 78 billion euros, three-year bailout financed by the European Union (EU) and the International Monetary Fund (IMF).

Argentine's debt default last week also added to the gloom, even though it has so far had limited spillover to any other emerging markets.

The persistent tensions in the Middle East and Ukraine rounded out a tough week of trading for global markets last week, and took the edge off Friday's U.S. employment report which reduced expectations of an earlier-than-expected start to the Fed's rate-hike cycle.

Job growth slowed in July to 209,000 last month after surging by 298,000 in June, slightly below economists' forecast of a 233,000 job gain.

Still, July marked the sixth straight month employment expanded by more than 200,000, a signal of strength last seen in 1997, pointing to a solid recovery in the U.S. economy.

U.S. Treasury debt prices rose as traders trimmed bets the Fed would push rates up in the first half of next year.

The rate-sensitive two-year notes yield fell more than five basis points to around 0.476 percent . The 10-year yield also dropped to 2.500 percent , off three-week high of 2.614 percent, hit on Thursday.

As U.S. debt yields fell back, the dollar took a breather, with its index against a basket of major currencies off a 10-1/2-month high hit on Thursday.

"The July jobs data won't change the Fed's benign stance as it was about as "goldilocks" as it could be," said Shane Oliver, Head of Investment Strategy at AMP Capital in Sydney.

The dollar index stood at 81.301 <.DXY>, down from Thursday's high of 81.573.

The euro fetched $1.3429 , little changed in early trade but off last week's 8-month low of $1.3366. The dollar stood at 102.53 yen , down from 103.15 yen, a four-month peak hit on Wednesday.

Oil prices were under pressure with U.S. crude futures trading just above its six-month low hit on Friday, as oversupply in the Atlantic basin and low demand outweighed worries over political tensions in the Middle East, North Africa and Ukraine.
Source: Reuters

China July official services PMI dips to 54.2 in July(55 in June) a six month low

 Growth in China's services sector slipped to a six-month low in July as new orders rose at their weakest rate in at least a year, data showed, taking some of the shine off an industry that has been a bright spot in the Chinese economy this year.

The official Purchasing Managers' Index (PMI) for the non-manufacturing sector slowed to 54.2 in July from June's 55, the National Bureau of Statistics said on Sunday. That is the weakest reading since January.

A reading above 50 in PMI surveys indicates an expansion in activity while one below the threshold points to a contraction.

The slight retreat in the services sector came at a time when China's factories have started to recover, having earlier this year been one of the drags on growth in the world's second largest economy due to faltering demand at home and abroad.

In contrast, China's services companies have held up through

each slowdown since PMI records began in January 2007, with the index staying above 50 in every month.

A mixed performance from other measures in Sunday's PMI suggested that the services sector enjoyed an encouraging, albeit slightly muddy, outlook.

Growth in new orders fell to their slackest rate in at least a year in July. Yet at the same time, companies' business expectations jumped to a level not seen in at least a year. Inflation within the sector, be it production or final sales prices, also quickened to a rate unseen in at least 12 months.

Cai Jin, vice president of China Federation of Logistics & Purchasing, which publishes the services PMI in conjunction with China's government, advised investors to not read too much into the divergence.

"The volatility in the various sub-indices for the July services PMI was not great," Cai said. "The market in general is still stable."

In contrast, he said weakness in China's property sector persisted last month due to seasonal factors and muted demand.

"The market remains subdued. Prices are still in a downtrend, and declines have increased."

China's once-heated housing market has slowed this year as sales and prices turned south in their biggest pull-back in two years, driven in part by a cooling economy, and after the government tried for almost five years to calm the market.

But the extent and breadth of the downturn have surprised analysts, with many worrying that it is the biggest threat to the health of China's economy this year.

To limit the drag from a cooling housing sector on the overall economy, nearly half of China's regional governments have started relaxing curbs on home purchases this year, reversing controls that were instituted from as early as 2009.


STRONGER FACTORY GROWTH

The services PMI followed two manufacturing PMIs released on Friday that showed China's factory sector posting its strongest growth in at least 1-1/2 years last month, suggesting that the economy is gathering steam after a spate of stimulus measures.
Economic growth picked-up slightly in the second quarter, accelerating to 7.5 percent from an 18-month low of 7.4 percent between January and March.

Sunday's survey showed a sub-index for business expectations rose to 63.9 last month from June's 62.9, while the measure for new orders slipped to 50.3 from June's 50.9.

Production prices climbed to 58.2 from June's 57.1, while final sales prices jumped to 52.4 from June's 51.2.

But with China's consumer inflation running well below the government's annual 3.5 percent target, policymakers are unlikely to be fazed by rising prices in the service sector.

In fact, Chinese authorities have steadily loosened monetary policy since April to energise the economy, including relaxing the reserve requirements for some banks. The construction of railways and public housing projects have also been hastened to spur investment.

The services sector, which accounted for 45 percent of China's gross domestic product in 2012 and roughly half of all jobs in the country, is expected to post steady growth in coming years as the economy matures.

Source: Reuters

Bank of Portugal Unveils Plan to Rescue Banco Espírito Santo

       The WSJ reports,"Portugal's central bank late Sunday unveiled a plan to rescue the country's second- largest lender by breaking up the bank and pumping in billions of euros of state money.

The fate of Banco Espírito Santo SA  is surprising given that only a few weeks ago the Bank of Portugal said the lender had enough capital to withstand shocks coming from its parent, a Luxembourg-based conglomerate that ran into trouble after an auditor found accounting irregularities.

Banco Espírito Santo not only provided loans to the parent and its units but it also sold billions of euros of their debt to customers.

Under the €4.9 billion ($6.6 billion) plan, depositors and senior bondholders will be spared, while the bank's subordinated creditors and current shareholders will be in line for losses.

"It became imperative and urgent that a solution was implemented to guarantee deposits and safeguard the financial system," said Bank of Portugal Gov. Carlos Costa, who added that the bank had lost access to liquidity beginning Monday.

In a statement, the European Commission said the solution found was in line with state-aid rules.

Behind the bank's quick deterioration was a €3.6 billion first-half loss reported on Wednesday. While the Bank of Portugal was expecting losses close to €2 billion, it found out the lender continued to increase its exposure to the parent, Espírito Santo International SA, and related entities in the second quarter against its instructions.

Under resolution-fund rules, a bad bank will be set up with toxic assets from the lender, including the loans given to Espírito Santo entities that could be unrecoverable, and 56%-owned Banco Espírito Santo Angola, with a portfolio of souring loans. Current shareholders, including Banco Espírito Santo's parent, with a 20% stake, and France's Credit Agricole SA, with a 14.6% stake, will stay with the bad bank, along with subordinated creditors. The bad bank will be wound down.

Shares of Banco Espírito Santo have fallen more than 65% since Wednesday. They were halted from trading Friday at 12 euro cents.

The good bank, meanwhile, with all the deposits and other healthy assets, will receive the capital injection. It will be rebranded.

Authorities hope that by separating the healthy part of the bank from the bad, investors will be interested in buying it. Proceeds will be used to pay back the bailout loan".

Past Week was a rough week for the U.S. stock markets is it a downward trend or a pause?

 "Rough Week for the US stock markets:  S&P 500 down 2.7% at 1925.15. DJIA down 2.8% at 16493.37. Nasdaq Comp down 2.2% at 4352.64. Treasury yields mixed; 10-year rose to 2.505%. Nymex crude oil down 4.1% at $97.88. Gold down 0.7% at $1,293.60/ounce.

For the Dow, it was worst week since late January, and the second consecutive down week, and third of the last four. The index is now in the red for the year. That’s nothing compared to the 4.5% drop in Germany’s DAX, which saw its worst one-week percentage decline since June 2012. Junk bonds, meanwhile, sold off hard and are back where they were in October amid heavy outflows.

Whether all that signals a trend change or a pause is the question.

One thing is sure, though: It was a volatile week for the markets, and that adjective has not been used in quite a while. Last week’s flood of economic reports has investors revisiting their thinking about the time frames around Fed policy, and what that will mean for a market that has gone in largely only one direction for three years. Beyond the Fed and economy, there are an awful lot of things for investors to keep up with: earnings, Argentina, Espirito Santo, Gaza, Syria, Iraq, Russia, Ukraine, and Europe to say nothing of China’s banks and Japan’s Abenomics experiment".

Source: WSJ

WSJ: Portugal Mulls Rescue for Banco Espírito Santo

   After the dismal results of Portugal's Banco Espirito Santo Q2 Earnings report.

"Portuguese authorities are considering creating a bad bank in a recapitalization plan to save Banco Espírito Santo SA,  according to people familiar with the matter, as the country's No. 2 lender attempts to deal with astorm involving its parent company.

Under the plan, which could be announced late Sunday, the bad bank is expected to keep all of the lender's toxic assets, including the loans it provided to the troubled parent, Espirito Santo International SA, that could be worthless, according to these people. Current shareholders will remain owners of the bad bank.

The good bank, meanwhile, with all the deposits and other healthy assets, will receive a capital injection with part of a credit line set aside under Portugal's 2011 bailout program, these people said. The European Union and the International Monetary Fund lent €78 billion ($105 billion) under the three-year program that ended in May. Part of the loan—€12 billion—was set aside to help capitalize banks in case of need. More than €6 billion of that money is left.

It isn't clear how much of that money will be used for Banco Espírito Santo".

IMFSurvey: China Would Benefit from Slower but Safer Growth

China’s growth was 7.7 percent in 2013 and is expected to be around 7½ percent in 2014, in line with the government’s target, the IMF said in its most recent report on the state of the Chinese economy. Much of China’s slowdown has been structural, reflecting the natural growth convergence, but weak global growth has also contributed.

In their annual assessment, the report’s authors emphasize that China’s heavy reliance on investment and credit to drive growth since the global financial crisis is running out of steam as investment efficiency has been declining. The result has been resource misallocation and rising vulnerabilities.

Web of vulnerabilities

The report says that the current growth pattern has created a web of rising vulnerabilities. To finance rapid investment growth, firms and local governments borrowed from both banks and nonbank financial entities (the so-called “shadow banks”). This has resulted in rising corporate and local government indebtedness, which is the flip side of the large increase in total credit since 2008. In addition, many strands of the web run through the real estate sector.

While an abrupt adjustment in the near term is unlikely, given China’s policy buffers, repeated use of this growth strategy would further weaken balance sheets, reduce investment efficiency, and leave China more vulnerable to shocks in the future.

The report’s main message is that China needs to quickly implement the announced reforms to transition to a more sustainable growth path. Priority reforms are in the following areas: financial sector, state-owned enterprises, exchange rate, and local governments. Reforms should aim to eliminate distortions and implicit guarantees, strengthen institutions, and give the market a more decisive role, as the authorities emphasized.

The report indicates that implementing these reforms would unleash new sources of productivity growth and ensure that resources are used more efficiently. The reforms will also support both domestic and external rebalancing. While external imbalances have declined considerably, China’s external position is still moderately stronger compared with the level consistent with medium-term fundamentals and desirable policy settings. While progress with domestic rebalancing—moving the economy toward consumption and away from investment—has been slower, successful implementation of the reform blueprint should also achieve the desired shift toward consumption.

The report welcomes the authorities’ efforts to start addressing vulnerabilities. However, the authors also highlight that, while implementing the reform agenda will help contain risks, additional measures will be required. These include a reduction in local government off-budget spending, further slowdown of credit growth, and less investment growth.

The report points out that addressing vulnerabilities and implementing structural reforms will reduce growth in the near term. However, it will bring significant benefits over time in terms of higher income and consumption. The IMF argues that the authorities should accept somewhat lower growth in the near term and deploy a stimulus only if growth were to slow significantly below their target. To be concrete, for 2015, the IMF suggests to target a range of 6½-7 percent growth.

Faster implementation of reforms would have substantial benefits over the medium and long term not only to China, but also to the rest of the world. While spillovers to the global economy would reduce growth slightly in the short run, the benefits of a stronger and less vulnerable China dominate in the long run.

      By Mali Chivakul

      IMF Asia and Pacific Department