Showdown in the U.S.,political troubles in Italy and downward revision of China's PMI puts global markets under pressure

U.S. stock futures and the dollar came under pressure on Monday as a shutdown of the U.S. government seemed ever more likely, while the euro had political troubles of its own as the Italian government teetered on the edge of collapse.

Hardly helping was a surprise downward revision to activity in China's factory sector. While the final HSBC Purchasing Managers' Index (PMI) did edge up to 50.2 in September, that was well down on the preliminary reading of 51.2.

The end result was a shift out of equities and toward safe havens including the yen, Swiss franc and some sovereign debt. U.S. Treasuries also benefited from a view that the economic damage done by a government closure would be yet another reason for the Federal Reserve to keep interest rates low for longer.

Source: Reuters

China funds trim suggested stock, cash allocations, raise bonds

 Chinese fund managers trimmed their suggested equity and cash holdings for the next three months, while raising bond allocations on fears that a rally in high-growth stocks has outpaced fundamentals, according to a Reuters poll.

Average recommended stock weightings in a portfolio fell to 83.8 percent in September from 85 percent a month earlier and to 9.9 percent from 10.7 percent for cash, while climbing to 6.4 percent from 4.4 percent for bonds, according to a monthly poll of eight China-based fund managers conducted last week.

"There is a risk that stocks that have rallied strongly, particularly those driven by several popular investment themes earlier this year, could correct as we go into year's end," said a Shanghai-based fund manager.

The ChiNext Composite Index .CHINEXTC of mainly technology-related high growth start-up counters has surged nearly 70 percent in 2013 and currently trading at 52 times price-to-earnings, outshining the large cap-focused CSI300 . The large-cap index is up 19 percent from its June low but is still down 5 percent so far this year and is trading at 14.5 times.

Some respondents also said some good opportunities could emerge if initial public offerings in the A-share market resume at moderate valuations. Investors have suffered when IPOs were priced at excessively high valuations in the past, only to see share prices dive on listing debuts.

IPOs in the mainland have been suspended for nearly a year in a bid to reform the capital raising process with protecting investors' interests among its the regulator's aims.

Source: Reuters

China September final HSBC PMI disappoints

"China's factory sector grew only slightly in September as domestic demand faltered, a private survey showed, an unexpectedly weak outcome that suggests a firm rebound in Asia's economic powerhouse still remains elusive.

The final HSBC Purchasing Managers' Index (PMI) edged up to 50.2 from August's 50.1, figures on Monday showed.

Although a five-month high and showing the sector was growing, the survey was disappointing for investors as it was well below last week's flash reading of 51.2, with domestic orders weaker than preliminary estimates suggested.

New export orders picked up the slack, climbing to 50.7 from 47.2 in August to be above the 50-point mark separating expansion from contraction. After seasonal adjustments, however, the expansion was slight, HSBC said.

The Australian dollar, a proxy for growth in the world's second-largest economy, fell a quarter of a cent on the disappointment that activity was not as strong as hoped.

"The final reading was weaker than the flash and it showed that activity has weakened in the last 10 days," said Tao Wang, an economist at UBS in Hong Kong, adding a rebuilding of stocks by firms that had led the economic pick-up was slowing.

The softer-than-expected final HSBC PMI reading was in line with investor bets that China's economy is stabilizing, even if the revival is feeble and perhaps short-lived. Indeed, parts of the PMI poll suggested the economy is not out of the woods.

Factories cut jobs for the sixth consecutive month in September. And although output and new orders grew in September, HSBC noted the expansion was fractional after seasonal adjustments. In fact, it said some firms reported a contraction in output, citing unstable economic conditions.

"Growth is bottoming out on Beijing's mini-stimulus," Qu Hongbin a HSBC economist said, noting however that growth in domestic demand was unchanged from August.

Beijing's support and firmer growth in the United States, China's second-biggest export market, have put a floor beneath China's economy, which has slowed in 12 of the last 14 quarters".

Source: Reuters

Precious Metals Prices 09/29/2013 10.18p.m. Eastern Time

Gold Price Futures          3 months        US$   1,339.41

Silver Price Futures         3 months        US$        21.67

Japan:Boxed in by tax hike, Abe bets on business

Prime Minister Shinzo Abe's long-awaited decision this week on whether to go ahead with the first stage of doubling the sales tax is a major political gamble that proved career-ending for his predecessors, analysts say.

Since sweeping December elections on a ticket to kick-start the world's third-largest economy, the prime minister launched an unprecedented policy blitz - dubbed "Abenomics" - that appears to be taking hold as the economy expands and the stock market roars.

Abe underscored that early success with an upbeat speech to the New York Stock Exchange last week, calling for investors to get on board with his bid to regain Japan's one-time economic glory.

"Japan, as the third-largest economic powerhouse on the planet, will be back in full force again," he promised.

But his decision on hiking the tax levy, seen as crucial to chopping Japan's massive national debt, threatens to sink Abe's growth plans and subsequently his popularity.

Few, however, see the 59-year-old as having much choice, given the size of the national debt, proportionately the worst among the world's richest nations at more than twice the size of the economy.

The International Monetary Fund, among others, has been calling on Tokyo to fix its books, after credit rating agencies lowered their ratings on Japan.

NewsOnJapan

Japan's consumer prices up 0.8% in August

Japan's consumer prices rose 0.8 percent in August from a year earlier on higher gasoline and other energy prices, posting the highest margin of increase since November 2008, government data showed Friday.

The core consumer price index, excluding fresh foods, stood at 100.4 against the 2010 base of 100, the Ministry of Internal Affairs and Communications said. It registered the third straight month of increase.

In addition to rising energy prices, a narrower margin of decline as well as an increase in some durable goods pushed up overall prices, the ministry said.

NewsOnJapan

China Central bank has reiterated policy coordination

China's central bank has reiterated its commitment to a prudent monetary policy while also pledging to make its policy more targeted and coordinated to support the real economy.

"The central bank will fine-tune its policy in a timely and proper manner to seek a balance between stabilizing growth, advancing restructuring, promoting reforms and preventing risks," said a statement released on Sunday after a regular meeting of the People's Bank of China.

The bank vowed to optimize the distribution of financial resources to create a steady environment for China's ongoing economic restructuring and upgrading.

It also reiterated its pledge to push forward market-oriented reforms in its interest rate and exchange rate mechanisms.

The latest comments came amid the country's increasing efforts to deepen financial reforms.

China on Sunday opened a pilot free trade zone in Shanghai, which will be a test bed for a wide range of market-oriented reforms, including easing restrictions on finance, investment and trade, a move widely hailed as a crucial step in the country's reform and opening up.

Source: Xinhua

China's market feels muscle of first tourism law

"The cost of a four-day package tour to Hong Kong was about 2,500 yuan (around 400 U.S. dollars) previously, but it is as much as 5,000 yuan during the holiday," said Liu, 27, who works for an Internet company in Beijing.

The bad news for people of mainland China  is that both package and individual tour prices are expected to skyrocket from Oct. 1 when China's first tourism law comes into force.

These price rises are, in a large part, because of the law, but they are certain to unleash a torrent of gripes and acrimony in an already complaint-riddled industry. The hope is that the new regulations will help the industry to regulate iteslf in the long run.

The law includes provisions to counter the practice of zero, or even negative, fare tours. These are tours sold at or below cost price to lure ingenuous travelers who are then forced to purchase goods or tip guides while on holiday.

Travel agencies will be prevented from selling services at unreasonably low prices, or to profit by arrangements with designated stores. Travellers will not be obliged to accept any paid extras other than those specifically mentioned in contracts.

For time immemorial tour guides and travel agencies have been suspected of sharing profits with owners of stores, of taking commissions and kickbacks, but this will be illegal as of October.

"The domestic travel agency arena is a very competitive one. It's hard for travel agents to survive through low-price services alone," said Li Guang, general manager of the compliance office of the China Youth Travel Service (CYTS), one of China's leading travel agencies.

The law also address the problems of unfair competition and wanton price hikes which have bedevilled the travel industry for years and exasperate the public.

"These are deep-rooted problems which attract a lot of complaints. The the key to fixing these problems lies in strict implementation of the law," said Li Xinjian, a professor with the tourism management department in Beijing International Studies University.

Tourism insiders argue that the new round of price rises shows China's travel market returning to normal.

"Price wars were vicious in the past, while the recent rises are a sort of reasonable return to fair competition," said Wang Yanqi, director of the Research Center of Leisure Economy of China.

China's domestic travel market is the world's largest. Domestic tours totalled 2.96 billion in 2012, according to the China National Tourism Administration.

"The new law is not to impose restrictions on tourism shopping, but to target guides or agencies charging hidden commissions," said to Li Guang.

There are also calls for strict supervision of prices at popular locations.

"If prices were at normal levels in tourist attractions, there would be less scope for illegalities such as forced purchases and outrageous commissions," Wang Qiyan added.

Source: Xinhua

Faith in Economic revival put to test

Yet another budget showdown in Washington and yet another government crisis in Italy herald more turbulence for a global economy growing below trend. On top of these problems, banks and households in Europe are still shedding debt, several big emerging economies are slowing and markets are struggling to decode the Federal Reserve's policy signals. Yet there is a guarded confidence at some banks that a recovery, not powerful but worthy of the name, might finally be within reach.

Credit Suisse, for instance, is pencilling in 3.8 percent global growth for 2014, up from 3.0 percent this year and surpassing what it sees as the trend rate of 3.5 percent.

A lessening of fiscal headwinds will be important in allowing the hoped-for pickup in the United States, said John Calverley, head of macroeconomic research with Standard Chartered Bank in Toronto.

"So you should start to see growth moving up well into the 2.5, 3.0 percent range, maybe more, over the next couple of years," he said. The U.S. economy has expanded at an average pace of less than 2 percent in the last four quarters.

But that view could be sorely tested in coming days.

The White House, in its fourth major budget standoff with Congress since 2011, has vowed to veto a bill

approved by the Republican controlled  House of Representatives,to delay Democratic President Barack Obama's landmark healthcare law for a year as part of an emergency spending bill.

Italy's political instability has also revived concerns about its stagnant economy. Centre-right leader Silvio Berlusconi effectively brought down the government of Prime Minister Enrico Letta by pulling his ministers out of the cabinet on Saturday, further delaying agreement on changes intended to reduce debt and revive growth.

Source: Reuters

Brazil:Natural gas production grows faster than oil's

The Brazilian natural gas production growth curve is decoupling from oil’s. Since January 2012, when the country achieved the last monthly record of oil production (2.231 million barrels per day), that indicator has continued to fall and currently stands at 1.974 million barrels/day (11% less than the record level).  In the same period, the country’s natural gas production hit seven monthly records and reached 78.5 million cubic meters per day, 10.4% more than the volume recorded early last year.

According to Marcelo Colomer, an expert at UFRJ’s Energy Economy group, about 85 % of the Brazilian production of natural gas depends directly on oil production, by means of associated natural gas. “The trend is natural gas production becoming a little more independent," he says.

The decoupling of natural gas and oil production will also depend on the successful exploration of areas that will be offered at the 12th Round of Auctions of the National Agency of Petroleum, Natural Gas and Biofuels (ANP). Scheduled for November, the auctions will offer blocks with potential for the development of unconventional resources such as shale gas, whose production is booming with competitive costs in the US.

Gas Energy consulting firm director Marco Tavares also believes the growth of natural gas production in the country. According to him, the expansion of oil and gas is shifting from the Campos Basin to the Santos Basin, where the gas/oil ratio – which indicates the amount of gas produced for the same volume of oil – is greater.

Mr. Tavares says that, in the best case, the Campos Basin produces 80 meters cubic of gas for each cubic meter of oil. The pre-salt layer of the Santos Basin has an average of 220 cubic meters per cubic meter of oil after carbon dioxide is filtered out.

What now is a positive factor may turn into a problem. Brazil will probably double its domestic production of natural gas by 2020, but there is not a market for this energy resource at its current prices, which are considered high.

Source: Valor Economico

Economic Structural Change Vital to Successful Development

When a country shifts from being a largely agrarian economy to one based on services or industry, it is said to have undergone “structural change”. This has happened in some Asian countries, contributing largely to their economic development. Many low-income countries, however, have yet to undergo this 
process of structural transformation.

Harvard University professor of economics, Dani Rodrik. 

All sustained episodes of growth are underpinned by fundamental structural change. Of course, you can get growth spurts because of an improvement in the terms of trade or a sudden burst of capital inflows. But those tend to peter out unless there is the emergence and expansion of new industries, and movement of labor from traditional industries into modern industries. This is the essence of structural change. Without these things happening, a country is not likely to achieve long-term growth.

Asia has been the archetypal example of a traditional model of economic development for those economies with surplus labor and very low productivity levels, which are dependent on subsistence agriculture.

Then, new industries started to emerge, mainly in urban areas, and although still poorly educated, farmers became more productive factory workers. They were able to increase their income, and could send their children to school. This increased productivity has also set in motion a self-sustaining process of improvement in human capital skills.

It has happened in many Asian countries—Japan being the earliest example of a non-western country to industrialize. South Korea and Taiwan quickly followed, and from the 1960s through late 1970s, more Southeast Asian countries became industrialized, most notably China.

These Asian countries have focused on achieving rapid industrialization through outward-oriented, or export oriented, industrialization. They have been very pragmatic and eclectic in the types of instruments they used. 

What would be some barriers to structural transformation

in some African and Latin America countries—what we have seen is an obsessive attachment to a particular ideology. For example, during the 1960s and 1970s, many countries took import substitution to extremes.

in the 1990s, these countries were encouraged to focus on the fundamentals, and structural transformation would follow automatically. This did not quite work out for them.

The principle concern, then, is for a country to do its homework and figure out what are the problems that would affect structural change.

about countries that are rich in natural resources

Those countries come with a set of advantages and the belief that having natural resources can make them richer more quickly. But there is also the disadvantage of being natural resource rich, because the country can suffer from so-called “Dutch disease,” which means that non-natural resource sectors tend to be very unprofitable. For example, those countries exporting natural resources like oil or copper may find it much harder to use modern manufacturing techniques competitively.

There is really no good way out of this situation. I think the amount of diversification that can be achieved by resource-rich countries is limited vis a vis resource poor countries.

The best route for those resource-rich countries looking to diversity is to develop the fundamental capabilities and skills of their human capital to help improve productivity in the service sectors, rather than focusing solely on manufacturing. While this is a longer process, they have still the cushion of natural resource wealth in the short term.

IMF Survey

U.S.Mortgage Bonds Without Government Backing Face Tough Time

  According to an article published today by the Wall Street Journal:
"The market for mortgage bonds that aren't backed by the government suffered a setback this month, when one offering was shelved and another had to slash its price amid tepid investor demand".

"The struggles reflect the fits and starts suffered by banks and mortgage finance firms trying to revive the market for bonds backed by mortgages without government support, or so-called nonagency debt. The market for such bonds essentially collapsed under high default rates and poor investment performance during the financial crisis, following trillions of dollars of issuance during the housing boom.

The market was largely dormant until earlier this year, when more frequent sales to investors hungry for higher-yielding bonds lifted volume for 2013 to $12 billion. But investors have become more demanding since U.S. Treasury yields started rising in May.Government officials and regulators have been eager for nonagency mortgage market to recover, anticipating it can fill a void in home loan finance as they work to wind down U.S. housing-finance firms Fannie Mae and Freddie Mac. To reduce the roles of Fannie and Freddie, the Federal Housing Finance Agency is requiring the firms to sell debt that transfers some risks of default to private investors.

Investors remain especially concerned with the impact rising interest rates could have on nonagency bonds backed by jumbo loans–the ones packaged up by PennyMac and Shellpoint. Jumbo loans are those that exceed the $417,000 limit for government backing in most regions.

The Jumbo loan borrowers, are typically the slowest to refinance their debt as mortgage rates increase, which means mortgages can remain in the bonds longer than anticipated. That leaves investors with a bond filled with longer-term assets that pay lower rates than newer bonds, which pushes down the value of the debt.

Investors also worry they will have trouble exercising their right to demand lenders repurchase bad mortgages, a practice that at the heart of legal fights over boom-era loans. And the small size of the new-issue jumbo bond market makes it harder to trade the issues, discouraging some investors."

IMF Concludes 2013, Consultation with Italy Part I

Italy’s economy has been in recession for almost two years. GDP contracted by 2.4 percent in 2012, and at a similar annualized rate in the first half of 2013. The contraction was led by a sharp fall in domestic demand, reflecting tight credit conditions, fiscal adjustment, and depressed confidence. The unemployment rate is at post-war highs of 12 percent, with youth unemployment nearing 40 percent. Weak demand has also contributed to the narrowing of external imbalances. The current account deficit has declined from 3½ percent of GDP in 2010 to near zero in the first half of 2013, reflecting mainly a collapse in imports and steady exports.
A modest recovery is expected to start in late 2013, supported by net exports. After sharp declines in previous years, domestic demand is expected to recover slowly in the face of stiff headwinds from tight credit conditions. On this basis, growth is projected at -1.8 percent this year, before rising to 0.7 percent next year.
The ratio of nonperforming loans has almost tripled since 2007, while outflows of nonresident deposits and limited access to wholesale financing have raised the cost of funding. Credit conditions remain tight. 
Notwithstanding the weak economy, stress tests results suggest that the Italian banking system as a whole is able to withstand the losses under an adverse macroeconomic scenario.
The nominal budget deficit fell to 3 percent of GDP in 2012 on the back of sizeable fiscal adjustment, allowing the country to exit from the European Union’s Excessive Deficit Procedure, and is projected to be close to that level in 2013. In structural terms, the overall balance is projected to be near zero this year. 
After fiscal consolidation,and the announcement of the ECB of its outright money transactions,sovereign yields have fallen considerably.Debt, however, continues to rise and is forecast to exceed 130 percent of GDP in 2013.

In the absence of further structural reforms, medium-term growth is projected to remain low. The origins of Italy’s low trend growth pre-date the crisis and stem from its stagnant productivity, difficult business environment, and leveraged public sector.

Source: IMF 

Ukraine Faces Old-Style Emerging Market Crisis

 According to an article published in the Wall Street Journal of today:
"Ukraine faces and old style emerging market crisis, a currency pegged to the dollar,falling foreing exchange reserves, mounting  debt-service needs and a potential standoff with the International Monetary Fund are familiar ingredients for emerging-markets veterans. Ukrainian dollar-denominated bond yields have hit 10%, but investors should remain wary.
It took full advantage of easy money conditions earlier this year, raising $2.25 billion from international markets. But times have changed. Ukraine's economy stagnated in 2012 and is now turning down again, and government promises of reform have fallen short. Last week, Moody's cut it's debt rating to Caa1 and threatened to downgrade it again, a decision that probably cuts Ukraine off from markets.
That leaves an uncomfortable position. The central bank's foreign-exchange reserves have fallen to $21.7 billion, covering less than three months of imports—a level the IMF regards as critical. Meanwhile, Ukraine faces foreign-debt service payments of $10.8 billion to the end of 2014, Moody's says. Ukraine has adopted unorthodox tactics, including borrowing short-term in dollars in the domestic market and raising a $750 million syndicated loan with help from Russia's Sberbank.

The coming months are crucial. Ukraine is angling to sign a trade deal with the European Union. That might help with gaining support from the IMF, potentially boosting capital-markets access. But 2010's IMF package quickly went off the rails after the government backtracked on promises to raise gas and heating tariffs, which are heavily subsidized and politically sensitive. A deal with the EU could yet cause a backlash from Russia, which accounts for 30% of Ukraine's trade, according to Standard Bank.

Ukraine could yet face a currency crisis that would put it under severe pressure''.

The Big Challenge for the Fed is a sustainable recovery of the Economy

According to an article published in the Wall Street Journal:
""The Federal Reserve has plenty of items on its list of things to worry about. But a fear that its policies might inculcate another batch of asset bubbles is no longer as high on it.

But since late May, when Chairman Ben Bernanke first indicated the Fed might start reeling in its bond-buying program, investors have become much more gun-shy about reaching for yield. That is because long-term interest rates rose sharply—while the yield on the 10-year Treasury has fallen since the latest Fed meeting, at 2.64% it is still well above its early May lows.

Shares of real-estate investment trusts, whose steady dividends were drawing in yield-hungry investors, have fallen sharply, for example. 

 The Fed has, even if inadvertently, bought itself some breathing room on this front. The bigger challenge is pushing the economy into sustainable recovery".

U.S. Consumer Sentiment fell to 77.5 in September

U.S. consumer sentiment slid in September to its lowest in five months as consumers saw higher interest rates and sluggish economic growth ahead, a survey released on Friday showed.

The Thomson Reuters/University of Michigan's final reading on the overall index on consumer sentiment slipped to 77.5 in September from 82.1 in August - the lowest final reading since April.

The September figure was lower than the 78.0 economists had expected in a Reuters poll, but higher than a mid-month preliminary reading of 76.8.

Looming Congressional showdowns over a possible government shutdown and the need to raise the debt ceiling or else face the possibility of default have renewed worries about fiscal policy and legislative gridlock.

Other gauges also hit their lowest final reading since April: the gauge of consumer expectations, at 67.8, and the index of current conditions, at 92.6.

Economists fear consumer sentiment could weaken further if higher interest rates start to slow momentum in a housing revival that has been one of the brightest spots in the overall U.S. recovery.

The one-year inflation expectation rose to 3.3 percent from 3.0 percent while the five-to-10-year inflation outlook edged up to 3.0 percent from 2.9 percent.

Source: Reuters

Brazil: Gerdau Group bets on Efficiency and Diversification

Until 2007, with the exuberance of the global steel market, driven by China, Gerdau group went on a shopping spree. It has gained strength, expanded its geographic reach and took the opportunity to start diversifying. Thus it became the largest manufacturer of long steel in the Americas - second in the world - and one of the global leaders in steel for the automotive industry. The 2008 crisis that shook the world's economies demanded a new strategic configuration.

Currently, the global industry scenario is of steel oversupply, competition with Chinese, Russian, Korean and Turkish products, difficulties to export, depressed prices and tight profit margins. The strategy is: more horizontal and vertical diversification in the production chain and seeking management, efficiency and cost gains to stay competitive.

“Today, our focus involves flat steel, with projects in Brazil, investment in iron ore, expanding the specialty steel business in Brazil and the US and entry into India, and management to have efficiencies in all our operations,” the businessman says.

This year the company merged Gerdau Aços Longos in Brazil with Açominas, creating a single company, Gerdau Aços Brasil.

“We are firmly working in this strategy to differentiate ourselves, seeking better earnings,” the executive says. 

Currently, with annual sales of around 19 million tons of steel, the group gets 36% of its revenues in Brazil, 30% in the US, 21% in specialty steels (Brazil, US and Spain) and 13% in Latin America. Sales totaled R$38 billion last year. In generating operating profit, Brazil accounts for almost three-fifths - around 58%. Then it comes specialty steel with 21%, the US with 12% and Latin America with 9%. The installed capacity in 60 plants and rolling mills is 25.5 million tons. The group occupies the fourteenth position in the world ranking of the World Steel Association (WSA).

In Mexico, Gerdau is investing $600 million in a heavy profiles plant, within a plan to meet Americas demand for this product also from Brazil and the US. This project aims mainly toward import substitution and export to regional markets. “In the region, there is much to do in infrastructure in Peru, Colombia, Guatemala, Chile, Venezuela and Mexico itself.” The plant will have capacity of 1 million tons of steel and 700,000 end products (profiles).

Source: Valor International

London Stocks Fall Sharply on U.S. Concerns

UK markets were registering heavy losses on Friday morning as investor scaled back risk ahead of the weekend, as concerns over monetary policy and budget talks in the US continued to dampen sentiment.

Negotiations in Washington continue to limit upside on markets with investors nervous ahead of the October 1st deadline, hope that politicians can agree on a extension to the current debt-ceiling limit of $16.7tn to avoid a government shutdown when the new fiscal year begins. 

According to analyst Mark Zandi from Moody's Analytics, a three-to-four-week shutdown could shave 1.4 percentage points off US economic growth in the fourth quarter. He currently estimates an expansion of 3% without a government closure.

FTSE 100: SSE, Centrica attempt to rebound

Utility peers SSE and Centrica were high risers this morning, rebounding after some sharp falls earlier in the week following Ed Miliband's proposals to freeze energy bills if Labour is voted into power in 2015. Centrica has specifically attacked the plans, saying that it would not be "economically viable" to operate if prices were controlled against a background of rising costs.

Randgold Resources was a heavy faller after Bank of America Merrill Lynch cut its gold-price forecast by 17% to $1,294 an ounce for 2014. Nevertheless, the bank said Randgold remains amount its preferred 'buys' in the sector due to low costs, a rising grade profile and strong balance sheet. TheStreet Ratings, however, cut its rating for the stock from 'buy' to 'hold'.

Other miners, including Antofagasta, Vedanta Resources, Rio Tinto, Anglo American and BHP Billiton, were also providing a drag on markets today as metal prices fell. Rio was shrugging off some upbeat comments from Nomura which labelled it as "one of the cheapest stocks" within its peer group.

SABMiller, Diageo and Coca-Cola HBC were trading lower this morning after Credit Suisse downgraded the European beverages sector from 'overweight' to 'benchmark', saying it is the "third-most expensive sector in Europe [...] and has the second-worst earnings revisions".

Second-tier miners were performing in line with their FTSE 100 peers today as metal prices declined. EVRAZ, 
Polymetal, Hochschild, Centamin, Petra Diamonds and Kazakhmys were among the worst performers.

Source: LiveCharts

Jack Ma wants to keep a tight grip on Alibaba's Board

Alibaba Group Holding Ltd founder Jack Ma wants to keep a tight grip on the Chinese e-commerce company he founded even after he takes it public, and U.S. law gives him several ways to do so.
A source close to the company told Reuters that Alibaba, now effectively controlled by a group of 28 "partners" including Ma, senior executives and other insiders, is intent on keeping a similar structure when it goes public. Listing in the U.S. makes that possible, a key consideration in choosing New York over Hong Kong, the source said.
 Many U.S. companies, including Facebook and Google, use a dual-class stock structure to keep power within the hands of the companies' founders, Alibaba is likely to pursue a different approach, the source said.

But several corporate lawyers, said that one likely route for the 28 partners would be to list Alibaba by effectively creating a new partner that would become the publicly traded company.

Setting up the corporation that way - known as an "Up-C corporation," or umbrella partnership - can give the original partners much stronger voting rights, lawyers said.

While Japan's Softbank Corp, which owns 35 percent of Alibaba, and Internet company Yahoo, with 24 percent, each have a seat on Alibaba's four-person board of directors, neither company is represented among the 28 partners. In fact, there are no outside investors in the partners' group.

The partners' powers may increase after the IPO as it gains control of an expanded board of directors. Yahoo will lose its board seat when it sells half its stake in Alibaba in the IPO.

Under the structure the company envisions, Alibaba's shareholders would still have the ability to approve or reject all the directors. 

Source: Reuters

ECB'S GUIDANCE DETERRED VOLATILITY, BIAS REMAINS TOWARD RATE CUTS, SAYS CœURÉ

European Central Bank (ECB) member Benoît Cœuré noted that the implementation of a forward guidance has deterred market volatility and the Eurozone monetary authority continues to have an easing bias which makes further rate cuts possible.

While admitting that it was too early to determine if the forward guidance had "worked", Cœuré was convinced that in its absence, "money market rates would have displayed more upward volatility than was observed." 

The ECB member did make clear that the central bank was not targeting specific value for money market rates, but sought to make sure that "their fluctuations remain within reasonable bounds and do not hurt economic recovery". 

According to Cœuré, the guidance itself is a useful tool that "explicitly incorporates an easing bias, thereby accounting for the possibility of further cuts in policy rates". 

The majority of analysts currently expect ECB rates to remain at 0.5% until April 2015 and, rather than a cut, expect another round of long-term refinancing operations (LTROs) designed to flood credit markets with liquidity. The new LTRO could be implemented as soon as the end of the year, according to a recent Reuters poll. 

Source: LiveCharts

FED'S GEORGE SAYS TAPERING SIZE IRRELEVANT, WARNS ON DELAY

Federal Reserve Bank of Kansas City President Esther George indicated that the size of the initial tapering (reduction of the Fed's asset purchase program) may be irrelevant, but warned that delaying its start may have costs. 

George is the foremost monetary policy hawk with voting rights on the Federal Open Market Committee (FOMC) and has dissented at every meeting this year. At the most recent September 18th meeting, George voted against the policy action because she was "concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations," according to the FOMC statement. 

Speaking at a Colorado Economic Forum on Thursday, George noted her disagreement with Fed colleagues. "My preferred course of action would have been to begin tapering asset purchases at last week's meeting," she said. 

She reminded listeners that tapering is simply a slowing down of the extraordinary measures and should not in itself be considered a tightening of monetary policy. "Delaying action not only allows potential costs to grow; it also has the potential to threaten the credibility and predictability of future monetary-policy actions," she warned. 

George also explained that winding down unconventional measures was justified given the current state of the economy. "An initial reduction in the pace of its sizable asset purchases would be appropriate given the ongoing improvement in economic conditions," she said.

However, George seemed unconcerned about the actual size of the first reduction. "I don't know that the initial amount really matters in the context of its impact," she said, though she stressed that "what is important, though, is that we will have to be clear, once we start, on where we will be going with the end of the program."

Source: LiveCharts

U.S. consumer spending rises, incomes up most in six months

U.S. household spending rose in August as incomes increased at their fastest pace in six months, signs that momentum could be growing in the U.S. economy despite  months of harsh government austerity.

American families spent 0.3 percent more last month, which was in line with the median forecast in a Reuters poll, Commerce Department data showed on Friday.

Incomes rose 0.4 percent, the biggest gain since February.

Even after taking into account tax bills and price increases, incomes rose by the most since March.

Indeed, the strength in consumer spending also appears to have stopped a worrisome decline in the inflation rate.

The Commerce Department data showed that the 12-month core inflation rate, which excludes volatile food and energy prices, has been largely steady since April, coming in at 1.2 percent in August.

Source: Reuters

Precious Metals Prices 10.58 p.m. Eastern Time

Gold Price Futures     3 months    US$   1,324.44

Silver Price Futures    3 months    US$       21.59     

Gerdau: Brazil needs Structural Reforms to be competitive

"We see several government initiatives that are positive, such as infrastructure concessions and those that have been taken to make the industry more competitive, with tax breaks on payroll, reducing the tax burden of IPI (Tax on Industrialized Products). This has helped, but for the country to grow at levels much higher than 2% or 2.5%, it needs structural reforms. It has to reduce the tax burden, have more competitive interest rates, invest more in education, make huge investments in infrastructure.


We see that there are funds, plans and all these announced concessions of highway, airports and railways. However, investments end up stuck when executing the bid, in the discussion of marginal returns and rules or time implementation of works and obtaining licenses".

Measures proposed by the steel industry to the Brazilian Goverment

"Increasing domestic consumption of steel, improving the capacity to compete with its peers and reducing the tax burden. Data show that if Brazil's GDP grows 4%, the steel industry is likely to expand 5% to 7%. But it grows very little if it [GDP] stays at 1% to 2%. The multiplier effect of GDP is very large. That is, the country needs to grow to stimulate steel consumption".

"Having that, there must be equality so that we can compete. We have a real interest rate of 2.4% (compared to 1% or 1.5% of our competitors), electricity at $80 per MWh against $40 in most countries), natural gas at $17 per MBTU, expensive and inefficient logistics... Not only companies need to be efficient, the country needs also. The tax rate in Brazil is 35% of GDP, a developed world rate. In India it is 10%, in China is 20% and in Mexico 15%. Brazil taxes as a developed country: Europe, US and Japan".

Excerpts of Interview by Valor International to André Gerdau

Russia threatens travel restrictions for Japanese officials to disputed islands

Russian Foreign Ministry said on Thursday that it will ban visa-free travel for Japanese officials to the disputed Kurile islands if Japan continues to make statements assuming ownership of the islands.

The two countries have been involved in a decades-old dispute over islands north of Hokkaido, known as Kurile in Russia and referred to as the Northern Territories in Japan.

"If for some reason Japanese politicians cannot refrain from making public statements on the subject of the islands after a visit to Russian territory, we reserve the right to limit their participation in such trips," the ministry said in a statement.

The ministry said in a statement that the current visa-free regime for Japanese officials was a "humanitarian act" that allowed for visiting the graves of their ancestors.

It referred to a statement Japanese Minister of State for Okinawa and Northern Territories Affairs Ichita Yamamoto made during a visit to the islands.

It cited him as saying that his view of "the need to return (northern Japanese) territories" was reinforced by the trip.

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