WSJ: Defiant Putin Readies Retaliation Against Western Sanctions Over Ukraine

     The WSJ reports,"Mr. Putin has shown no outward sign of buckling under the weight of sanctions—the harshest yet imposed by Brussels and Washington—aimed at getting him to stop supporting pro-Russia rebels across the border in Ukraine.

The Russian Foreign MInistry described eastern Ukraine as on the verge of a "humanitarian catastrophe" and said Tuesday it would push for an international mission to help masses of civilians fleeing the fighting. At Russia's request, the United Nations Security Council met for a briefing on the situation Tuesday night.

The Ukrainian government dismissed the initiative as cynical and said it had detected a major increase in Russia's military forces across the border. A U.S. official confirmed there has been a buildup; a North Atlantic Treaty Organization official put the number at about 20,000 Russian troops.

Kiev and Western capitals have said they fear Russia could send troops in to support separatists under the guise of a mission to protect civilians. Moscow denies any such plan.

But tension has been rising in recent weeks as Kiev's forces have gained ground against rebels, nearly cutting off the separatist strongholds of Donetsk and Luhansk from each other and their supply lines to Russia.

U.S. officials have accused Moscow of responding with a major increase in supplies of weapons and irregular fighters, as well as artillery and rocket attacks across the border. Moscow denies that.

Moscow has been calling on Kiev to accept a cease-fire in a bid to save the separatists from a military defeat that would be a political setback for Mr. Putin as well.

In the last few days, Kiev's advance has appeared to slow amid heavier rebel resistance. On Tuesday, a military spokesman said the military had retreated from Yasinuvata, a small city on the northern outskirts of Donetsk, only a day after reporting it had been taken. The spokesman said the pullback was driven by a desire to avoid civilian casualties.

A day earlier, more than 400 Ukrainian troops who had been surrounded by rebel forces for weeks and were running out of ammunition and provisions sought temporary refuge in Russia after their comrades were unable to come to their aid. They were returned to Ukraine on Tuesday.

Officials in Donetsk, meanwhile, reported at least two civilians were killed in shelling on the western edge of the city Tuesday. The situation in Luhansk appeared worse, with several civilian casualties reported and water, electric and telephone service disrupted. City officials said about half the population of 460,000 had fled.

In Geneva, the United Nations High Commissioner for Refugees said Tuesday that Ukraine had reported 117,000 people displaced within the country since the conflict began. Russia said about 168,000 Ukrainians had crossed the border as refugees, part of an overall flow of 730,000 into its territory since the start of the conflict, UNHCR said. Kiev has challenged Moscow's refugee figures as inflated, however.

Russia's Foreign Ministry blamed Kiev for the civilian suffering. Its call for an international humanitarian mission seemed certain to fail amid Western opposition, but raised fears that Moscow could be planning to intervene more directly.

The U.S. and EU last week imposed another round of sanctions on Russia, affecting important economic sectors such as banking, oil and weaponry.

But Mr. Putin has shown no sign of changing tack. On Tuesday, he said he had told the government to draw up retaliatory measures, but gave no details.

"This must be done very carefully, to support domestic producers but not harm consumers," he said during a visit to the Voronezh region.

Earlier Tuesday, Prime Minister Dmitry Medvedev said Russia would formulate its response to the European sanctions, which effectively forced the closure of Dobrolet, an airline that was flying to Crimea, the Ukrainian region that Russia annexed in March.

Russia's Vedomosti newspaper reported Tuesday that the government was considering a partial or total ban on overflights of Siberia by European airlines, which use the route to shorten trips from Europe to Asia. Government officials declined to comment on the report, however".

Downside pressure on the U.S. equity markets is persisting in afternoon action

Services sector activity jumps to highest level in over eight years 

The ISM non-Manufacturing Index  showed growth in the service sector accelerated to the highest level since December 2005, rising to 58.7 in July, from 56.0 in June, and above the 56.5 level that economists surveyed by Bloomberg had expected, with a reading above 50 denoting expansion. The report is generally considered a measure of economic strength in the service sector and is the companion to the ISM Manufacturing Index, which showed growth accelerated more than expected for last month. Activity in the non-manufacturing sector was bolstered by new orders and production both growing to 64.9 and 62.4, respectively, while prices dipped 0.3 points to 60.9. Moreover, employment rose 1.6 points to 56.0. 16 of the 17 industries reported growth in July, while the lone industry that reported contraction was utilities. Finally, comments from the sector indicated that "stabilization and/or improving market conditions have positively affected the majority of the respective industries and businesses." 

Factory orders  rose 1.1% month-over-month (m/m) in June, compared to the 0.6% gain that was expected by economists, while May's 0.5% decrease was revised lower to a 0.6% decline. Meanwhile, June durable goods orders—reported two weeks ago—were revised to a 1.7% gain, from the 0.7% rise initially reported. 

The final Markit U.S. Composite PMI Index—a gauge of business activity in both the services and manufacturing sectors—was revised slightly lower to 60.6 for July, from the 60.9 in the preliminary report, and just shy of the 61.0 level in June. The release is independent and differs from the ISM's business activity reports, as it has less historic value and Markit weights its index components differently. 

The recent downside pressure on the U.S. equity markets is persisting in afternoon action, with geopolitical concerns lingering, while some mostly favorable earnings and economic data appear to be fostering uncertainty regarding the timing of the Fed's first interest rate hike. Domestic services sector growth jumped to the highest rate in over eight years, while factory orders rose much more than anticipated. Meanwhile, CVS Caremark and Coach topped analysts' earnings expectations, while Target lowered its profit forecast and AIG offered some cautious commentary regarding its property and casualty unit. Treasuries are lower, along with gold and crude oil prices, while the U.S. dollar is higher. Overseas, European equities finished mostly higher following some upbeat earnings and economic data.

Source: Schwab

U.S. Department of Commerce: New Orders for Manufactured Goods increased 1% in June.

WSJ: Will rising interest rates choke off the U.S. shale boom?

    The WSJ reports, "between 2006 and 2012, U.S. exploration and production companies clocked almost $1 trillion in capital expenditure, far above operating cash flow of $670 billion, according to Raymond James. Companies have proven adept at filling that funding gap, not least by raising debt.

The E&P sector in 2007 was carrying $28.84 of net debt per barrel of oil equivalent produced, according to data from IHS,  roughly equal to operating cash flow. By last year, net debt per barrel had jumped 36% to more than $39, while cash flow was essentially flat.

That should provide fuel for those who doubt the shale boom's longevity, as rising debt levels choke off returns and the capacity to invest in new wells to keep production growth going.

Moreover, as the Federal Reserve moves closer toward the day it will eventually raise rock-bottom interest rates, that should compound the squeeze on E&P spending power. Interest costs have been minimal in the grand scheme of things, according to Sanford C. Bernstein. Looking at E&P sector cash flow from the start of 2011 through the first quarter of this year, it found that out of average revenue of $56 per barrel of oil equivalent, cash interest charges ate up only $2.

Don't count on rising rates to swamp shale drilling, though.

For one thing, a lot of the sector's existing debt carries fixed interest rates, perhaps 90% of the amount outstanding, according to Brian Gibbons at CreditSights. The industry also isn't facing imminent demands to pay back or roll over a lot of this debt. Roughly 60% of the amount outstanding, or $346 billion, doesn't mature until after 2020, according to data from Mr. Gibbons.

High-yield issuers, typically with weaker credit profiles, have especially pushed maturities out in the near term. Whereas 27%, or $129 billion, of investment-grade E&P debt matures by the end of 2018, only 13%, or $17 billion, of the sector's high-yield debt falls due by then.

All this offers some structural protection against rate increases. Still, new borrowing by E&P companies, especially high-yield issuers, may well face constraints as time goes on and debt-servicing costs rise.

Yet investors in the sector, and lenders to it, must also consider how the money is being spent. Since 2012, output per rig in U.S. shale oil and liquids projects has been growing by around 30% to 40% a year, and at percentages in the low teens for natural gas, according to Citigroup.  Such productivity gains mean every dollar of investment goes further. Moreover, a big chunk of the investment of the past decade was to secure land, rather than drilling per se, so again, that should reduce the pressure to spend to a degree.

U.S. E&P companies also benefit from their location. Tightening sanctions on Russia and continued turmoil in the Middle East should push more energy-targeted capital toward the relative stability of North America, while also offering geopolitical support to global energy prices.

A true demand shock—a sharp slowdown in Chinese energy demand, for example—could hit E&P activity by undercutting oil prices. Or the sector could finally hit a wall on productivity growth. But when it comes to funding, at least, even the mighty Fed is unlikely to derail shale".

Xiaomi Surpasses Samsung As China’s Top Smartphone Vendor, Says Canalys

Xiaomi’s name may mean “little rice” in Chinese, but it’s not so little anymore. According to a report from Canalys, Xiaomi has surpassed Samsung as China’s top smartphone maker, thanks to massive growth over the past year.

The report says that in the second quarter, Xiaomi shipped 15 million smartphones in China, up from 4.4 million devices, or 240%, in the same period a year ago. Samsung, meanwhile, shipped 13.2 million smartphones in the second quarter, down from 15.5 million a year ago. The other top smartphone makers were Lenovo, Yulong, and Huawei.

This means that Xiaomi now holds a 14% share of China’s smartphone market. Canalys says that in Q2 2014, China, the world’s largest smartphone market, accounted for 37% of global shipments, or 108.5 million units. Eight out of the ten top smartphone vendors in China were domestic companies, including Xiaomi, Lenovo, Yulong, Huawei, BBK, ZTE, OPPO, and K-Touch, which together shipped 70.7 million units and took a 65% market share. Samsung and Apple, the only international players on the list, accounted for 20 million units, or 18% of the smartphone market in China.

Xiaomi has previously said that it hopes to sell 60 million handsets this year, and 100 million devices next year.

According to Canalys research analyst Jingwen Wang, Xiaomi’s success in Q2 2014 was helped “by an unanticipated, temporarily under-strength Samsung performance during the quarter.”

“But this is only half the story–Xiaomi has also executed on its strategy to grow volume shipments. It has delivered compelling products at aggressive price points, focused chiefly on its locally relevant MIUI software features and services, backed by effectively targeted marketing.”

Arguably, Xiaomi has been able to deliver “compelling products at aggressive price points” by taking many cues from (many critics argue outright copying) successful competing devices and then selling them at cost. As TechCrunch’s Matt Burns noted last week, Xiaomi can sell its hardware below the market average by spending very little on advertising and for the most part avoiding selling its products in stores, depending on direct consumer sales instead.

Source: TechCrunch

Service Industries in U.S. Expand at Fastest Pace Since 2005

Service industries in the U.S. expanded in July at the fastest pace since December 2005, showing the economy was building more momentum at the start of the second half of 2014.

The Institute for Supply Management’s non-manufacturing index increased to 58.7 from the prior month’s 56, the Tempe, Arizona-based group said today. A reading greater than 50 shows expansion. The median estimate in a Bloomberg survey of economists was 56.5. A measure of orders climbed to an almost nine-year high.

The pickup among service providers, combined with the strongest rate of growth in more than three years at American factories, shows the world’s largest economy was strengthening at the start of the third quarter. Faster payroll growth is helping fuel consumer demand, raising the odds a self-reinforcing cycle of increased hiring and spending is underway.

“The U.S. economy has continued to pick up a little bit of steam,” Guy Berger, a U.S. economist at RBS Securities Inc. in Stamford, Connecticut, said before the report. “More jobs mean more money in people’s pockets, which means they can spend more, which leads businesses to expand activity more and increase hiring and investment.”

Estimates of the 73 economists in the Bloomberg survey ranged from 54.5 to 57.5. The non-manufacturing index has averaged 55 this year compared with 54.7 in 2013.

Source: Bloomberg

WSJ: Index Providers Mull Removing(Some) Russian Companies Following Sanctions

      The WSJ reports,"two of the world's largest index providers might strip out certain Russian companies from their indexes following the latest round of Western sanctions, potentially handing investors another reason to avoid the country.

MSCI Inc.  late Thursday said it is considering removing VTB Bank's ruble shares from its Russian index after the U.S. Treasury Department slapped the bank with sanctions restricting its access to U.S. financial markets. It cited concerns that if VTB issues new equity, that could possibly lead to some market participants trading the shares in the secondary market, breaking those sanctions.

MSCI also said it was launching a new series of composite indexes that will exclude Russia for investors wanting to avoid exposure to Russian assets.

The move followed a similar call from S&P Dow Jones Indices LLC, which Thursday said it was asking clients whether it should remove sanctioned firms from its indexes.

"This is very bad news for the Russian market," said Maarten-Jan Bakkum, senior emerging-market strategist at ING Investment Management. "There could be some big players that decide to no longer invest in Russia, so it's natural they now have benchmarks to reflect that. There will be outflows."

Mr. Bakkum said his firm has held a smaller slice of its investments in Russia than benchmarks would suggest since before the crisis began, but it still holds some Russian stocks.

Many investors use indexes, sometimes following them faithfully, by buying assets in proportion to their makeup, and sometimes holding a smaller or larger share of certain securities, depending on their views about them. With fund managers around the world tracking benchmarks, at least in part, inclusion brings billions of dollars of investment flows.

"This is about signaling," said Tim Ash, an emerging-markets analyst at Standard Bank in London. "A lot of investors are forced to hold debt or equity because they're part of an index. So when they're out of the indices, then investors have less reason to buy them. It could have a large market impact as it could encourage people to sell existing positions they have."

S&P, a subsidiary of McGraw Hill Financial Inc.,  is considering whether sanctioned firms' shares should be removed from its indexes, or if a specific country adopts sanctions on a firm, whether the index provider should treat that firm as sanctioned in all jurisdictions. Russia makes up 5.4% of S&P's global emerging-markets equity index.

Still, while index firms discussing dropping Russian companies is negative for general sentiment, some investors doubt the moves will change peoples' investment outlooks.

"If investors didn't want to invest in Russia, they could have made that choice already—no one is forcing them to own Russian stocks. An Ex-Russia index is just an additional convenience for those investors," said Pavel Laberko, a fund manager at Union Bancaire Privée".

INTL FCStone Sees Commodities Sliding Again During August

Commodities collectively had their worst monthly performance in more than two years during July and the group could “push somewhat lower” in August, says INTL FCStone in a monthly outlook. The firm describes August as usually a “messy month” for equities leading to an “even sloppier” September. “If we are correct on our view on U.S. equities, we could see spillover selling hitting precious metals, oil, and some of the base metals, at least initially, before the various asset classes start to decouple,” INTL FCStone says. “Gold is already struggling under the prospect of decent growth in both China and the U.S., lackluster investment demand, poor technicals and the likelihood of higher U.S. rates going into 2015. Platinum and palladium could also ease a bit this month, although their fundamentals look much better than gold. Oil markets are oversupplied and with various geopolitical hotspots not imperiling oil flows, at least for the moment, we think the path of least resistance is lower still. We believe that lower trading ranges are also in store for energy products, as well as for natural gas. Base metals have regained some lost ground this week, but we think that some in the group are overextended based on fundamentals. Zinc, in particular, is now at a three-year high and we believe prices have more than discounted the complex’s improving supply/demand profile, while not adequately discounting the very real possibility of a further contraction in the Chinese real estate market.” However, INTL FCStone says lead “has not participated fully in the recent base metals advance and we still like its story heading into the second half of the year.” The firm describes itself as neutral on copper at current prices, looking for a sideways range this month.
Source: Kitco

Oil steady above $105 on geopolitical tension

Brent crude oil steadied above $105 a barrel on Tuesday as tensions in the Middle East and North Africa balanced ample supply in the Atlantic basin.

"The market is stable because of a combination of two things. On the one hand you see geopolitical tensions ... but on the other hand you see maintenance from refineries and enough supply," said Hans van Cleef, senior energy economist at ABN Amro in Amsterdam.

Brent crude was unchanged $105.41 by 1020 GMT, after gaining 57 cents on Monday.

U.S. crude was up 17 cents at $98.46, after rising 41 cents in the previous session to settle at $98.29 a barrel.

Global oil demand has been running below supply over the last few months, building up a glut of high quality crude oil in the West African, European and Asian markets.

Growth in China's services sector slowed sharply in July to its lowest level in nearly nine years, indicating a recovery in the broader economy is still fragile and may need further government support. [ID:nL4N0QA16T]

Brent closed at $104.84 a barrel in Friday, its lowest settlement since April 2, while Brent for immediate delivery has been at a discount to futures for the longest period since 2011. This contango market structure indicates a well-supplied market.

"At this moment the market is mainly supply driven," said van Cleef.

Libyan oil output dropped to around 450,000 barrels per day

(bpd) from 500,000 bpd last week. State-run National Oil Corp says oilfields are secure despite clashes between rival militias in the capital, Tripoli.
Oil production has dropped from 1.4 million bpd a year ago because of strikes by oil guards and fighting that has damaged Tripoli's main airport and sent foreign diplomats and workers fleeing abroad.


Oil exports from Iraq, OPEC's second-largest producer, rose to an average of 2.442 million bpd in July from 2.423 million in June, the oil ministry said on Monday, even though Islamic State insurgents tightened their grip in the north.

A Reuters survey of analysts suggested U.S. commercial crude oil inventories fell by about 1 million barrels in the week to Aug. 1, while gasoline stocks were unchanged. 

SOURCE: Reuters