Copper gains on easing Ukraine tensions, optimism about China's Economic outlook.Zinc rebounds although rising LME stocks weigh on prices

 Copper prices rose slightly on Monday as tensions eased between Russia and Ukraine and on optimism about the outlook for China's economy and metals demand, though expectations of rising copper supplies put a brake on gains.

Three-month copper on the London Metal Exchange

(LME) traded at $7,005 in official rings, up 0.2 percent. It ended the previous week lower for the second week in a row, down 1.1 percent.

Russia's defence ministry said on Friday it had finished military exercises in southern Russia, which the United States had criticized as a provocative step in the Ukraine crisis.

European shares bounced back from a sharp two-week slide, in a move that helped support risk appetite. [.EU]

"There are indications of some easing in geopolitical tension over the weekend, and that is helping the equity markets. Base metals are benefiting from that," said Nic Brown, head of commodity research at Natixis.

Investors were monitoring the situation in the Middle East, with a focus on turmoil in Iraq and on talks in Cairo between Israel and the Palestinians on ending the month-old Gaza conflict.

Robust Chinese export numbers on Friday pointed towards healthy metals use. But solid trade data has yet to be seen globally, with particular questions over the impact of Russian sanctions on the European economy and demand for metals.

This week, industrial production data from China and the United States should paint a clearer picture about the health of the global economy.

"The data from China has been improving for a while now, and the gradual loosening of monetary conditions has been supportive to growth," Brown said.

Investors are concerned, however, that prices for the metal used in power and construction are likely to come under pressure in the second half due to rising supply.

The copper market is expected to be in a 226,000 tonne surplus by the end of 2014, a Reuters poll in July showed, with the surplus seen rising to 285,000 tonnes in 2015

Reflecting a drop in enthusiasm for copper holdings, hedge funds and money managers cut their bullish bets in copper markets in the week to Aug. 5, the Commodity Futures Trading Commission said on Friday.

In other metals, aluminium traded at $2,033 a tonne, up 0.4 percent. The discount to three-month prices narrowed to $4.25 per tonne on Friday, its biggest discount since December 2012, reflecting tightening supplies.

Zinc , untraded in official rings, was bid at $2,311 a tonne, up 0.7 percent, rose 0.9 percent, rebounding after hitting its lowest in more than three weeks in the previous session. Prices have been weighed down by rising inventories, with LME stocks increasing by more than 5 percent this month. 

Lead traded at $2,255 a tonne, up 0.7 percent and nickel traded flat at $18,560 a tonne. Tin , untraded in official rings, was bid at $22,350, down 0.1 percent.

In industry news, Michael Farmer, among the world's most famous metals traders, said he had no intention of abandoning the market that earned him his fortune after he was named baron of the British House of Lords. 
  



Source: Reuters

Alibaba Profit Growth Boosts China Internet Valuations

"Investors are driving up valuations on Chinese Internet companies as an almost threefold surge in Alibaba Group Holding Ltd. (BABA)’s profits buoyed the earnings outlook for the industry.

Online companies includingVipshop Holdings Ltd. (VIPS), a fashion retailer, and YY Inc. (YY), a social entertainment website, have led gains this year on the Bloomberg China-US Equity Index. The gauge, with about half of its members focused on web business, trades at 18 times forward earnings, near a four-year high reached July 28 and up from a multiple of 11 in February.

Investor confidence is growing in companies that provide online services to the world’s largest pool of Internet users -- some 632 million people -- after Alibaba said in June that net income rose to about 23.1 billion yuan ($3.7 billion) in the 12 months through March from 8.4 billion yuan a year earlier. Alibaba,China’s largest e-commerce operator, is preparing its U.S. listing in a deal that analysts estimate may value the company at $198 billion, three times what it was in May last year.

“The surge in Alibaba’s valuation along with its booming sales and profit help bring people’s attention to the quick growth in China’s Internet sector and its potential,” Tan Chiheng, an analyst at Granite Point Capital Inc., which invests in Chinese equities, said by phone from Boston. “The giant has made quite a few acquisitions that have lifted the targets’ valuations. More mobile-focused web companies can become buying targets.”

Alibaba’s profit soared as sales jumped with shopping promotions and new acquisitions bolstering mobile services. The Hangzhou-based company said in a filing for its initial public offering that it will make investments and acquisitions in areas of mobile, digital media and logistics after announcing 26 deals worth $16 billion since the start of 2012, for companies ranging from online mapping and video to web browsers.

Companies in the KraneShares CSI China Internet Fund (KWEB), an exchange-traded fund that tracks web companies with listings abroad, boosted sales by 41 percent and earnings by 30 percent on average in the first quarter, compared with sales growth of 19 percent and 24 percent profit increase for U.S. web-focused companies, according to Brendan Ahern, managing director at New York-based Krane Fund Advisors LLC. The ETF has rallied 16 percent in 2014.

Sales Surge

Guangzhou-based Vipshop’s net income surged fourfold in the first quarter this year as sales jumped 126 percent to $701.9 million. YY, also based in Guangzhou, said profit rose 139 percent in the April-June period while revenue doubled to $135.6 million.

“The Internet is picking up momentum in China, the population is vast and the language, regulation and cultural barriers have made it good for local companies,” Gustavo Galindo, senior emerging markets portfolio manager at Russell Investments, said by e-mail Aug. 1.

While Chinese Internet company shares have done “tremendously well,” the prices may not reflect the risk that more and more mergers and acquisitions make differentiation more difficult, according to Devan Kaloo, head of global emerging markets at Aberdeen Asset Management Plc.

Margin Compression

“The boundary between Internet companies is blurred,” Kaloo said in an interview at Bloomberg’s headquarters in New York on Aug. 6. “They are going to fight each other out. That means there potentially a big risk to margin compression because of that.”

SOURCE: BLOOMBERG

   In a complacent market it is always prudent to take a cautious approach,and  a measured risk. 

China Loosens Monetary Conditions in Test of Credit Power

Bloomberg’s new China Monetary Conditions Index -- a weighted average of loan growth, real interest rates and China’s real effective exchange rate -- rose 6.71 points to 82.81 in the second quarter from the previous three months. That’s the biggest jump since the July-September period of 2012, with May and June’s numbers the first back-to-back readings above 80 since January 2012.

New yuan loans in July will be a record high for that month, according to a Bloomberg News survey of analysts before data due by Aug. 15, suggesting officials are keeping the credit spigot open even as debt risks mount. While consumer inflation below the government’s goal allows room for more easing, economic data will determine how far policy makers go.

“The central bank worries more about inflation and financial risks, but the government is worried more about growth and employment,” said Ding Shuang, senior China economist at Citigroup Inc. (C) in Hong Kong. “Growth will rebound in the second half, so that will give the central bank some support in not expanding credit and liquidity further.”

Each $1 in new credit added the equivalent of an extra 20 cents in GDP in the first half of 2014, according to data compiled by Bloomberg. That compares with 29 cents in full-year 2012 and 2013 and 83 cents in 2007, when global money markets began to freeze.

Inflation figures released Aug. 9 suggest monetary easing has yet to trigger price gains in the broader economy. The consumer price index rose 2.3 percent in July from a year earlier, the same pace as in June and below the government’s 3.5 percent target. The producer price index fell 0.9 percent, the 29th straight decline.

Bloomberg’s monetary index was introduced in July, with the data series compiled back to 2003. The gauge peaked at 148.02 in November 2009 amid China’s 4 trillion-yuan stimulus plan during the global financial crisis.

This index gives you a handy one-shot explanation of what China’s doing on its monetary policy and its relationship with growth,” said Fielding Chen, a Bloomberg economist in Hong Kong who created the gauge. “It’s showing us that the current pickup in growth momentum, which is likely to be a little stronger in the coming few months, is underpinned by accommodative monetary conditions.”

While economic expansion picked up to 7.5 percent in the April-June period from a year earlier, growth in the third and fourth quarters will dip back to 7.4 percent, according to median estimates in Bloomberg News surveys of analysts.

Data due Aug. 13 from the statistics bureau will provide more indications of the impact of Li’s easing. Industrial output growth in July kept pace with June’s 9.2 percent gain, which was the biggest for a single month since December, while growth in fixed-asset investment excluding rural households picked up to 17.4 percent in the first seven months, according to Bloomberg News surveys.

Total debt reached 251 percent of gross domestic product as of June, up from 234 percent in 2013 and 160 percent in 2008, according to Standard Chartered estimates. Bad loans at China’s commercial banks rose to 1.08 percent of total lending at the end of June, the highest in three years, government data show.

“The government set the growth target at 7.5 percent and they want to keep their promise, so they are prepared to keep policy accommodative even at the cost of rising leverage,” said Larry Hu, head of China economics at Macquarie Securities Ltd. in Hong Kong. “But they are very likely to lower the target next year -- China just can’t grow at 7.5 percent without government stimulus and without adding leverage.”

Source: Bloomberg

Alibaba Cleans Up 'Gray Market' for Some Prestigious Brands

   The WSJ reports,"Chinese e-commerce company Alibaba Group Holding Ltd. is rolling out a powerful new incentive to attract luxury brands: removing some listings from its online shopping sites.

Like many premium brands, Burberry  PLC had been fretting about a flood of discount Burberry products—some of them fakes—on Alibaba's two big marketplaces, which accounted for 80% of China's estimated $300 billion in online shopping last year. Burberry hadn't authorized any of those vendors to sell its goods.

Alibaba would do its best to get those products off its sites if Burberry opened its own shop on Alibaba's online mall, Burberry was told, according to people familiar with the talks. Burberry opened a store on Alibaba's Tmall in April.

Interviews with nearly three dozen sellers, brands and analysts indicate that Alibaba has recently taken similar steps for other high-profile Western brands, including Estée Lauder

 Cos., hoping they would embrace Tmall, China's main online venue for big brands. Alibaba has promised that once they open their own stores, it will purge goods sold on Tmall by retailers not authorized by the brands or do more to fight fakes on Taobao, Alibaba's online huge online bazaar, according to people familiar with the matter.

Alibaba has been eager to woo high-end brands ahead of a listing on the New York Stock Exchange that is expected to be one of the largest initial public offerings in U.S. history. The presence of luxury brands lends a luster that can draw shoppers, other brands and potentially investors.

Alibaba told many shops on its sites that they had to stop selling the U.K. brand's products. It blocked some stores from posting Burberry items, and checked more frequently to make sure vendors weren't using Burberry copyrighted images, sellers said.

"Tmall is having a change of strategy," said Vincent Wong, chairman of Hong Kong-based Pompei Holdings Ltd., which specializes in selling luxury items at discounted prices and was told to pull Burberry-branded goods from its Tmall shop. "When a global brand opens its store, we are not allowed to display that brand."

Alibaba's offer to crack down on gray-market goods for brands that open Tmall stores provides a powerful incentive for brands to join the site, said Scott Galloway, chief executive of L2 Inc., a New York-based research firm. Alibaba's websites are a door to China's 300 million online shoppers. In 2012, the combined transaction volume of Taobao and Tmall topped one trillion yuan, or about $160 billion, more than Amazon.com and eBay combined.

Alibaba's intervention can be extremely effective.

Nearly four dozen Tmall shops sold Estée Lauder beauty products earlier this year. But around the time Estée Lauder opened its Tmall store in May, all third-party products had vanished, according to YipitData. Estée Lauder's opening also benefited its sister brand, Clinique, which had opened a Tmall shop last year: All third-party sales of Clinique products also disappeared from the site in May.

In contrast, the number of third-party vendors selling products from Gucci, which doesn't have a Tmall store, rose to 69 in June from 63 in April. Third-party vendors of Giorgio Armani SpA and Ralph Lauren Corp.  —two other brands without a Tmall store—also increased. Gucci and Ralph Lauren declined to comment. An Armani spokesman said the company "engages in various activities around the world to protect [its brands'] integrity," but isn't commenting on the situation in China.

In July, Gucci, Yves Saint Laurent and other luxury brands under Kering SAKER.FR -0.66% filed suit against Alibaba, saying that the Internet company's shopping, marketing and payment platforms "knowingly make it possible for an army of counterfeiters to sell their illegal wares." Two weeks later, the luxury brands withdrew their claims against Alibaba, saying in a joint statement with Alibaba that the parties had "agreed to work together in good faith. to further reduce counterfeiting of Kering brands."

Alibaba declined to comment on its dealings with luxury brands. Burberry referred to its April news release, saying that the Tmall store offers the "purest articulation of the Burberry brand on any of the Alibaba platforms to date." A spokeswoman for Estée Lauder said the brand was "pleased with our relationship with Tmall China thus far and look forward to continuing to expand this relationship.''

Brands also have complained about counterfeits on Alibaba's other website, Taobao, an online bazaar with eight million sellers offering 800 million products. Alibaba has stepped up efforts to deal with the issue, and in the past has signed agreements with Coach Inc.COH +5.43% and LVMH Moët Hennessy Louis Vuitton SA, among others, to crack down on fakes.

People familiar with Alibaba's marketplaces said its efforts to eliminate unauthorized sellers while recruiting brands to Tmall have intensified in recent months.

In December, Alibaba signed an agreement with the British government and said it would remove gray-market products for U.K. brands that opened official shops on Tmall, according to a spokesman for the country's Trade & Investment division. The French and Italian governments have also signed agreements with Alibaba, but haven't said whether Tmall promised to clear gray-market goods.

Some Western mass-market brands that already had Tmall shops, such as Nike Inc.NKE +0.93% and New Balance Athletic Shoe Inc. also are starting to see gray-market goods cleared away, according to YipitData. That pushes more sales to their official stores.

In April, 12.6% of Nike athletic shoes sales on Tmall came from the brand's flagship store. That percentage had nearly doubled by July, according to YipitData.

Nike said the brand has devoted "considerable resources" to fighting gray-market goods offline and online, including working with Tmall to address the issue.

Dan McKinnon, senior counsel of trademarks and global brand protection at New Balance, said the company has spoken to Alibaba "many times" about its concerns about gray-market goods and counterfeits on its shopping platforms. This year, the company noticed fewer gray-market New Balance shoes on Tmall, he said. The percentage of New Balance sales on the site coming from the brand's store climbed to 69% from 57% between April and July.

Analysts said it may be harder for Alibaba to crack down on unauthorized sales for things like sneakers, since unlike the luxury firms, mass-market brands often have authorized distributors on Tmall, making it harder to winnow out the problem shops. Doing so might also hurt Tmall's sales and traffic.

"They need to clean their ecosystem to please the highest-end brands, but on the other hand, the counterfeit and gray-market goods generate a good amount of sales," said Alex Misseri, head of e-commerce at digital-consulting firm Razorfish.

For the gray-market vendors, the selective bans on sales of some brands has been frustrating.

"In an ideal scenario, they don't want people like us, they want the brand owners," Mr. Wong said. "They allow people like us because it generates sales and demand."

US weekly initial jobless claims fell by 14,000 to 289,000 last week

Weekly initial jobless claims fell by 14,000 to 289,000 last week, below the 304,000 level that economists surveyed by Bloomberg had expected, as the prior week's figure was upwardly revised by 1,000 to 303,000. Moreover, the four-week moving average, considered a smoother look at the trend in claims, declined by 4,000 to 293,500, while continuing claims decreased by 24,000 to 2,518,000, north of the forecast of economists, which called for a level of 2,512,000. 

Treasuries are higher in late-morning action despite the employment data, with the yield on the 2-year note nearly unchanged at 0.45%, while the yields on the 10-year note and the 30-year bond are declining 2 basis points to 2.45% and 3.25%, respectively. 

In the final hour of trading, the U.S. economic calendar will yield the release ofconsumer credit, forecasted to show consumer borrowing was $18.7 billion during June, down from the $19.6 billion posted the month prior. 

Source: Schwab

ECB says Ukraine crisis threatens EU recovery, keeps rates low

The Ukraine crisis has heightened risks to the euro zone's weak and uneven economic recovery, and a tit-for-tat sanctions war could compound the problem, the European Central Bank said on Thursday as it held borrowing rates at record low levels.

ECB President Mario Draghi cited instability across the Middle East as well as tensions between Russia and Western countries over the conflict in Ukraine among factors weighing on growth in the single currency area. Moscow has retaliated for European Union sanctions by halting imports of food from Europe.

At a news conference after the bank's monthly policy-setting meeting, he stressed the ECB was ready to resort to quantitative easing - printing money to buy securities - if the outlook for inflation fell further. But he brushed off July's 0.4 percent reading, the lowest in more than four years, as a glitch due to temporary energy and food price falls.

"Geopolitical risks are heightened, are higher than they were a few months ago. And some of them, like the situation in Ukraine and Russia will have a greater impact on the euro area than they ... have on other parts of the world," Draghi said.

Having cut interest rates to record lows in June, the euro zone's central bank kept them steady, waiting to see whether schemes such as the ultra-cheap four-year loans to banks it will launch in September will prompt them to lend more.

The decision by the ECB's Governing Council, with representatives from the 18 countries that use the euro, had been expected by economists.

Many are now shifting their attention to next year, when they hope the ECB will follow the United States and other major central banks in launching a quantitative easing programme.

Draghi explicitly mentioned that option along with the possibility of buying asset-backed securities (ABS), despite the stated reluctance of Germany's influential Bundesbank.

"I can only reaffirm that the Governing Council is unanimous in its commitment to also use unconventional measures like ABS purchases, like QE, if our medium-term outlook for inflation were to change," the ECB chief said.

The ECB expected strong take-up for next month's flood of cheap money for banks to lend to businesses, he said, adding that real interest rates in the euro zone would remain negative for far longer - up to five years - than in the United States.


EVENTS

While Thursday's news conference did not signal any change in policy, some economists said events could make the ECB act.

"The euro zone is at a crossroads and the economy can go either way," said James Knightley, an economist with ING.

"We are starting to see some signs of stagnation and the geopolitical situation is adding to the risks. Can the weaker euro and better credit conditions offset that? If they don't, that will force the ECB's hand."

Russia has banned imports of fruit and vegetables from the European Union in retaliation for sanctions against Moscow, while NATO warned this week that Moscow could use the pretext of a humanitarian mission to invade eastern Ukraine.

Nonetheless, many economists do not expect a reaction from Frankfurt unless there is a dramatic turn for the worse.

"The geopolitical situation is increasing risks to the economy but we don’t expect them to change course until next year," Societe Generale economist Anatoli Annenkov said.

"We expect the ECB to launch an asset purchase programme early next year, buying private-sector rather than government bonds at the outset. But for the time being, they are going a different route to encourage lending."

In June, the ECB became the first major central bank to charge banks for holding their deposits overnight, a step designed to stop them hoarding cash and lend instead.

Apart from Ukraine, the euro zone faces other hurdles.

Data this week showed Italy, the bloc's third-biggest economy, has slipped back into recession while the Bundesbank says even powerhouse Germany stagnated in the second quarter.

Italian Prime Minister Matteo Renzi has led calls to move away from spending austerity to adopting looser EU budget rules, but has been rebuffed by Berlin.

Draghi, an Italian, weighed into the debate by saying that those countries that have carried out the most convincing structural economic reforms were reaping the best rewards in higher growth - an implicit rebuke to Italy and France.

He urged euro zone governments to stick to EU deficit reduction rules and not throw away the gains of fiscal consolidation.

In France, the region's second biggest economy which is also struggling, President Francois Hollande said the ECB and Germany must do more to boost growth and fight a "real deflationary risk" in Europe. 

Asked about mounting French calls for a weaker euro to stimulate growth, Draghi listed reasons why conditions were ripe for a fall in the euro's exchange rate, including divergent interest rate prospects with the United States.

Low prices are partly a result of spending cuts and lower wages, reforms the ECB does not want to hinder. But if prices get stuck at low levels, the ECB insists it is ready to act.

Source: Reuters

Russia retaliates with bans on food imports from EU, U.S.

Russian Prime Minister Dmitry Medvedev laid out the details of his country’s response to Western sanctions on Thursday, banning imports of a wide range of foods and considering wider retaliatory measures.

“Fulfilling the presidential order, I’ve signed a government decree. Russia imposes a total ban on deliveries of beef, pork, fruit, vegetables, poultry, fish, cheese, milk and dairy products,” Medvedev said, opening the weekly government session.

Medvedev said Russia won’t import those products from the European Union, the U.S., Australia, Canada and Norway for one year, adding that the decision could be reviewed before the end of 12-month period.

Medvedev said Russia has also prohibited Ukrainian airlines from making transit flights over Russia’s airspace to Azerbaijan, Georgia, Armenia and Turkey. He said Moscow is considering imposing similar restrictions on EU and U.S. companies, banning them from transit flights over Siberia to Asia.

The moves are the latest sign of defiance from the Kremlin in the face of growing Western pressure to end its support for pro-Russia separatists fighting in Ukraine. By targeting imported foods, the Kremlin is sending the message that the country is ready to make sacrifices in order to stand up to the West.

At the same time, the import bans will have a limited impact on the bulk of Russia’s population, which relies mainly on domestic foods and imports from other former Soviet countries.

The food ban would hit farmers in Eastern Eurohpe, but would have little impact on the EU’s overall economy.

Source:Marketwatch

WSJ:Both declining bank lending and heavy debt burdens are hurting the euro zone economic recovery.

Both declining bank lending and heavy debt burdens are hurting the euro zone economic recovery.

On the one hand, economists argue the recovery is being held back because debt burdens remain far too high. Total public- and private-sector debts are equal to more than 400% of gross domestic product in Ireland and Cyprus, and over 300% in Spain, Portugal and Greece. And the stock of bad debts now equals 50% of loans in Cyprus, 33% in Greece and 16% in Italy, 14% in Spain and 11% in Portugal. On the other hand, economists also warn the economy is weak because it is being starved of new credit: Bank lending shrank by another 1.8% in the year to the end of June in the euro zone. In Spain, it fell by 8% in the year to the end of May, in Portugal by 7% and in Italy, Cyprus and Ireland by 4%, according to Morgan Stanley.

Deleveraging, it seems, is both the solution to the euro zone's problems and the source of all its woes.

 The deleveraging can be done in two ways.

 A good deleveraging is when balance sheets are restructured and bad debts written off. This way, viable businesses and creditworthy households should be able to borrow from healthy banks to fund productive investment. The economy grows and the burden of debt falls.

 A bad deleveraging is when governments, households and companies try to tackle excessive debts by cutting spending and overindebted banks refuse to lend so that the economy shrinks and the burden of debt rises, creating a vicious spiral.

What can be done to speed up the process of good deleveraging? There are three requirements: first, banks must write down their loans to realistic valuations and raise any capital needed to absorb the losses; second, banks need access to a robust insolvency regime that will allow them to swiftly restructure bad debts, if necessary by forcing companies and households into bankruptcy; third, there needs to be an abundant supply of equity capital so that banks can unload restructured assets from their balance sheets.

True, the European Central Bank's Comprehensive Assessment of the 131 largest euro-zone banks—comprising an asset-quality review and stress test—is supposed to address the first of these problems. Encouragingly, in the year since the ECB plan was announced, euro-zone banks have raised more than €40 billion ($53.72 billion) of capital via equity issues and asset sales

Copper hits five-week low on strong dollar, Chinese data

Copper sank to a five-week low on Wednesday, pressured by a strong dollar and data pointing to slowing growth in top metals consumer China.

Three month copper on the London Metal Exchange, closed 1.2 percent lower at $6,970 a tonne. It hit a low of $6,951.75 a tonne in intraday trade, its lowest since June 30.

Three-month nickel ended 1.7 percent higher at $18,725 a tonne, rebounding from earlier falls that had pushed the metal to its weakest level since June 25 at $18,256.

Eugen Weinberg, head of commodities research at Commerzbank, said selling pressure was not restricted to copper and nickel.

"All metals today are under strong pressure due principally to two factors: weaker Asian markets, particularly Chinese, and a strong U.S. dollar."

The dollar held near an 11-month high against a basket of major currencies supported by positive U.S. data and a sharp fall in Germany's industrial orders in June, which weakened the euro to its lowest since November.
A stronger U.S. currency makes dollar-denominated commodities, including base metals, more costly for holders of other currencies.

Data on Tuesday showed activity in the U.S. services sector hit an 8-1/2 year high last month and factory orders surged in June, bolstering expectations of solid economic growth in the third quarter.

Indications that growth in China's services sector had slowed weighed particularly on copper, which is used in construction and electrical goods.

Growth in China's services sector in July was at its lowest level in nearly nine years, a private sector survey showed on Tuesday, indicating a recovery in the broader economy is still fragile and may need further government support.

On Monday the Chinese government reiterated that it would increase investment in areas including the property sector, while authorities will advance wide-ranging economic reforms such as changing the fiscal and pricing systems.
This plan to catalyse infrastructure investment in the second half may help offset the slowdown in the property sector, said Helen Lau, senior metals analyst at UOB-Kay Hian Securities in Hong Kong.

"We should not be too bearish because the outlook for demand in the second half is good," Lau said.

Trading sources said, however, that small importers of refined copper in China are likely to delay term shipments as local banks cut lending following a probe into an alleged metal financing scam. This could create extra supply in the international market, putting further pressure on the metal.

Aluminium ended 0.6 percent higher at $2,025 a tonne, zinc closed 1 percent lower at $2,357.50 a tonne, lead ended 0.2 percent higher at $2,243 a tonne and tin closed 1 percent lower at $22,280 a tonne.

U.S. crude stocks fall as imports dip; steep gasoline drawdown -EIA

 U.S. crude stocks fell last week as imports dipped, while lower refinery output contributed to a surprise sharp drop in gasoline and distillate inventories, data from the Energy Information Administration showed on Wednesday.

Crude inventories fell 1.8 million barrels in the week to Aug. 1, compared with analysts' expectations for a decrease of 1.7 million barrels.

Crude stocks at the Cushing, Oklahoma, delivery hub rose 83,000 barrels and U.S. crude imports fell 181,000 barrels per day, the EIA said.

Gasoline stocks fell 4.4 million barrels, confounding analysts' expectations in a Reuters poll for a 300,000-barrel gain.

Distillate stockpiles , which include diesel and heating oil, fell 1.8 million barrels, versus expectations for a 900,000-barrel increase.

Refinery crude runs fell 158,000 bpd or 1.1 percentage points to 92.4 percent of total capacity.

"The drawdowns in gasoline and distillate fuels are impressive and the further drawdown in crude oil inventories should combine to support the complex," said John Kilduff, partner at Again Capital LLC in New York.

Oil prices briefly extended after the data, with U.S. crude climbing above $98 a barrel and Brent reaching an intraday high of $105.44 a barrel before retreating.

By 10:54 a.m. (1454 GMT), U.S. crude was up 50 cents at $97.88 and Brent up 65 cents at $105.26.

Source: Reuters

Greek deflation slows in July, trend intact

 Greek consumer prices fell 0.7 percent in July, with the annual pace of deflation decelerating from a 1.1 percent fall in June, data from the country's statistics service showed on Wednesday.

Greece's EU-harmonised deflation rate also slowed down to -0.8 percent in July from -1.5 percent in June, coming in below a -1.3 percent rate expected by economists in a Reuters poll.

In November, deflation in Greece hit its fastest pace since monthly records began in 1960, registering a 2.9 percent year-on-year decline.

Euro zone inflation fell to just 0.4 percent in July, its lowest level since the depth of the financial crisis nearly five years ago, highlighting deflation risks on the European Central Bank's radar. [ID:nL6N0Q63J8]

************************************************************** 
    KEY FIGURES       JULY  JUNE    MAY    APRIL   MARCH   FEB 
    CPI y/y           -0.7  -1.1   -2.0    -1.3    -1.3   -1.1 
    EU-harmonised     -0.8  -1.5   -2.1    -1.6    -1.5   -0.9 
    ---------------------------------------------------------- 
    source: ELSTAT 



Reuters

DespiteThe failure of Banco Espirito Santo the EU bank reform is on track

The failure of Banco Espirito Santo is not a harbinger of disaster for Europe’s nascent banking union. On the contrary, the main lesson from the Portuguese bank's collapse and rescue is that European bank regulation is getting stronger.

Of course, the situation is lamentable. BES should never have been allowed to develop incestuous relations with its financially challenged owners. It would have been better to make senior creditors, rather than the Portuguese state, provide the 4.4 billion euros judged necessary to help cover possible losses. And it’s disturbing that the Troika – which includes the European Central Bank that will soon regulate all big euro zone lenders – managed to miss BES’s issues given it has overseen Portugal’s economy since its national bailout in 2011.

Still, the BES plan is far superior to last year's disorderly Cypriot bank rescue, when uninsured depositors suffered losses. It is also better than most of the bailouts during the financial crisis five years ago, in which governments limited even shareholders' losses. At BES, both shareholders and junior creditors will be on the hook. Besides, taxpayers should not end up losing out directly. Levies on the nation's banking system should make up for any shortfalls.

As far as regulation goes, the failures belong to an old regime. Once the European Central Bank starts regulating the big euro zone lenders in November, it will hopefully do a better job. And it will not be allowed to be kind to senior creditors. As of January 2016, they will be eligible to be "bailed in" during bank rescues.

There is another reason that BES shouldn’t set an unhappy precedent. It is unlikely that many European banks are controlled by families that also run networks of opaque and leveraged entities, let alone entities which manage to borrow from the family bank without disclosing the loans to either regulators or the bank's own board of directors, as BES alleged last week.

Investors seem to understand that the collapse of BES is not the beginning of a doom loop of financial woes and strain on government finances. At the height of the credit crunch in 2012, any bank failure tended to make yields on government debt jump. Portugal’s actually rallied on Aug. 4.

Although BES's structure is extraordinary, more conventional euro zone banks may yet fail. But if they do, the Portuguese lender provides a template of how to proceed – and one which can and will be further fine-tuned.

Source: Reuters

Italy's economy returns to recession

 Italy slid into recession for the third time since 2008 in the second quarter, underlining the chronic weakness of the euro zone's No.3 economy and pressuring Prime Minister Matteo Renzi to complete promised reforms.

Figures on Wednesday from statistics agency ISTAT showed gross domestic product unexpectedly declined by 0.2 percent in April-June from the previous three months. A Reuters poll of economists had forecast growth of 0.2 percent.

The economy also shrank by 0.1 percent in January-March, meaning it has returned to recession, defined as two consecutive quarters of contraction. 

Unions and opposition parties said the figures showed Renzi had failed to address the problems of the country, which the leftist SEL party said faced a "real economic disaster".

However, Economy Minister Pier Carlo Padoan rejected suggestions that the government would have to pass an emergency budget to ensure Italy respected European Union deficit rules.

Italy has posted only one quarter of growth since mid-2011, expanding 0.1 percent in late 2013. Adjusted for inflation, second quarter GDP was the lowest for 14 years, ISTAT said.

Italian stocks fell more than 2 percent after the data and the risk premium on Italy's 10-year bonds over those of Germany widened by 12 basis points from Tuesday's close. 

Renzi has announced ambitious labour and tax reforms to revive growth needed to curb Italy's 2 trillion euro debt burden but progress has been slow, with his energies taken up for weeks by a draining parliamentary battle over constitutional reform.

His calls for a more expansive interpretation of European Union budget rules have been met sceptically by partners, who fear slackening fiscal discipline will simply push up the debt - already the world's fourth biggest - without growth.

However in a letter to parliamentarians after the data was reported, Renzi said there was no alternative to the reforms.

"So we must move forward with greater decisiveness," he said.

European Commission economic policy spokesman Simon O'Connor said the EU had already said Italy should stick to its budget plans.

Italy's official projections see growth of 0.8 percent and a deficit of 2.6 percent of GDP in 2014, but Padoan ruled out any emergency measures to keep the budget deficit within the EU's ceiling of 3 percent of GDP.

"The government is closely watching public finances and with attentive spending controls, there's no need for a supplementary budget," Padoan, a former chief economist at the OECD, told RAI state television.


REFORMS

The Italian GDP reading and data showing German industrial orders fell at their fastest in almost three years in June will reinforce concerns about feeble growth and inflation in the euro zone ahead of a European Central Bank meeting on Thursday. 

Germany and France, the bloc's two biggest economies, are due to report second quarter GDP figures next week.

Spain, once at the fore of the euro zone debt crisis alongside Italy, posted second quarter growth of 0.6 percent last week, suggesting their economic fortunes are diverging.

Italy's bond yields have plunged since the ECB pledged at the peak of the crisis to save the euro, but Wednesday's data highlights the lack of progress made in addressing the problems of an economy that has stagnated for more than a decade.

"It has been difficult to distinguish between peripheral Europe for some time, but what we have seen this year is the outperformance of countries that have implemented structural reforms and improved their competitiveness like Spain and Ireland," said Azad Zangana, European Economist for Schroders in London.

"Meanwhile countries that have been slow and unwilling to embrace reforms such as Italy and France, have been a drag on the wider Eurozone economy," he said.

The Bank of Italy said last month that GDP had contracted by 9 percent since the global financial crisis began in 2007.

Beyond an 80-euro-a-month tax break for millions of low-income workers introduced in the second quarter, Renzi has yet to translate promises to revive growth made when he took office in February into action.

Even the impact of the tax break has been questioned after the head of Italy's retail association Confcommercio said the effect on consumer spending had been "almost invisible".

Last month, the Bank of Italy cut its growth forecast to just 0.2 percent for 2014, in line with forecasts from other bodies including the International Monetary Fund and the Organisation for Economic Cooperation and Development.

The data did offer some encouraging signs, however.

ISTAT said industrial output, which in Italy is usually closely correlated with GDP, rose 0.9 percent in June, driven by gains in investment and consumer goods, after posting its steepest drop since 2012 a month before. 

Source: Reuters

German industrial orders fall at their sharpest rate in almost three years

German industrial orders fell in June at their steepest rate since September 2011 as euro zone demand weakened and bulk orders were below average, with the Economy Ministry suggesting this was in part due to uncertainty over the Ukraine crisis.

Suggesting output in Europe's largest economy will have a weak start to the third quarter, contracts fell by 3.2 percent on the month as orders from the single currency bloc plunged by 10.4 percent, data from the Economy Ministry showed.

Big-ticket orders were well below their usual June levels and without them, bookings increased by 1.1 percent on the month.

The headline figure missed the Reuters consensus forecast for a 1.0 percent rise and undershot even the lowest estimate for a 0.5 percent decrease.

The Economy Ministry said "geopolitical developments and risks" probably led to more cautious ordering and a spokesman told a news conference that alongside the uncertainty caused by the tension between Russia and Ukraine, factors such as weaker euro zone appetite and lower bulk orders had also played a role.

NATO said on Wednesday Russia had amassed around 20,000 troops on Ukraine's eastern border and could use the excuse of a humanitarian or peacekeeping mission to send them in.

Analysts played down any impact of the Ukraine crisis on orders so far. Commerzbank economist Ralph Solveen said the strong decline in orders was due exclusively to a drop in notoriously volatile areas such as plane and ship orders, which he said was likely caused by a strong euro and a weaker global economy.

"Production is likely to fall in the coming months and that increases the risk the German economy will, after a slight dip in the second quarter, also disappoint in the third," he said.

The German economy grew at its strongest rate in three years in the first quarter but that was largely due to mild weather and it is generally seen slowing or even stagnating in the second quarter before accelerating again in the third.

A spokesman for the Economy Ministry told the news conference the German economy nonetheless remained "intact".


UKRAINE CRISIS

Andreas Rees, chief German economist at UniCredit Research, said while the downside risks had increased due the tension between Russia and Ukraine, hard data did not suggest it had taken its toll on companies in the second quarter.

Last week the European Union imposed sanctions targeting Russia's banking, defence and energy sectors. On Monday Germany said it had permanently halted Rheinmetall'splanned export of combat simulation equipment to Russia.

Werner Deggim, head of German engineering firm Norma Group , told Reuters he was not particularly worried about the sanctions: "They won't have a serious effect on our business," he said, confirming the company's full-year forecast for 4 to 7 percent revenue growth.

The Economy Ministry said the order level in the second quarter was 0.6 percent below the level of the first quarter, largely due to weaker appetite at home. That could be a concern for the German government, which is relying on domestic demand to prop up growth this year as exports remain weak.

The ministry said growth in the industrial sector would tend to be moderate in the coming months.

Factories producing capital goods got 6.4 percent fewer bookings in June than in the previous month and contracts for consumer goods manufacturers dipped slightly. Intermediate goods orders were the only bright spot, rising 1.6 percent.

Data due out on Thursday is expected to show industrial output climbed by 1.3 percent in June.

The orders data for May was revised up to a drop of 1.6 percent from a previous -1.7 percent.

Source: Reuters