ECB looks to banks to deliver QE on its behalf

 The European Central Bank is hoping a new round of long-term loans will be used by banks to drive down borrowing costs - a substitute for an asset-purchase scheme of its own which would avert a potentially damaging internal split.

The ECB unveiled the loans plan last month as part of a package of measures to breathe life into a sluggish euro zone economy, where inflation is running far below the central bank's target and there is a dearth of credit to smaller firms.

Presented as a means to foster bank lending to businesses, the scheme is in fact a hybrid programme that also offers banks access to cheap funding for four years with which they can buy financial assets.

Policymakers hope that in the round it will create a "credit multiplier" effect, tantamount to enabling the private sector to embark on quantitative easing (QE) - creating money to buy assets to keep borrowing costs low and boost spending - on the ECB's behalf.

"It's loans but not only loans," ECB Executive Board member Peter Praet said of the funding programme.

"It's also the liquidity injection, the funding substitution," he told Reuters in Paris on Wednesday.

The idea is that one or more of three things will happen:

Banks will use the money to lend to households and businesses, thereby directly helping to revive the economy; they take the money and buy assets themselves; they use the funds to substitute for issuing their own debt.

The latter two could lower the funding costs for all banks, even those who don't take the ECB's money, and spill over into looser conditions in the broader corporate credit market, hopefully making money cheaper and easier to access.

In a speech in Paris on Wednesday, Praet said the loans plan, or TLTRO, "has the potential to halt the vicious circle of constrained lending, weak macroeconomic conditions and elevated loan delinquencies, and re-ignite a positive 'credit multiplier' process".

Under the plan, banks can borrow up to 400 billion euros

($545 billion) in September and December at a slight premium to the ECB's regular funding operations. They have subsequent opportunities running through to mid-2016 to take additional loans.

Banks that have shown positive net lending between April of this year and the new funding operation can borrow up to three times their net new lending in that window and keep the money until 2018, so long as they continue to increase lending.

The terms of the plan do not stipulate, however, that banks must devote all the ECB loans to new lending, allowing the possibility of using some of the money for their own funding purposes or to buy assets.

"They are offering banks very cheap funding and asking the banks to expand their balance sheets, and in the process they will create money and they will buy assets," said RBS economist Richard Barwell.

"That will look an awful lot like what the ECB might have done themselves," he said. "But it won't be the ECB buying the assets, it will be the private sector buying the assets. So to me it looks a lot like arms-length QE."

Quantitative easing involves a central bank buying financial assets from banks and other private institutions with newly-created money, thereby increasing the amount of cash sloshing around an economy which should make it cheaper to borrow and easier to spend.

The money from the TLTROs (targeted longer-term refinancing operations) will eventually be repaid but it will expand the euro zone's money supply for four years.

Source: Reuters

Don't believe predictions of low interest rates by Edward Hadas

Will the new normal for interest rates be lower than the old? It is rapidly becoming conventional wisdom that years of near-zero overnight rates will be succeeded by an indefinite period in which borrowing costs remain low by the standards of the last few decades. The new consensus is reflected in financial markets: the yield on 30-year U.S. Treasury bonds has fallen from 4 percent to 3.4 percent this year. But it is built on unsound foundations.

Of course, predictions from central bankers should be discounted. When William Dudley, the president of the New York Federal Reserve and Mark Carney, governor of the Bank of England, state that they do not expect overnight rates to return to historical averages, they are partly engaging in very long-term forward guidance. They are trying to prevent the fear of higher rates in future from discouraging activity today.

But Dudley and Carney are not simply making things up. Like UBS economists, who predict that yields on 10-year government bonds in developed countries will peak at 3 percent to 4 percent, they are relying on a basic claim of financial theory: the equilibrium interest rate is the nominal growth rate.

In simple terms, this means that when the economy is functioning well, the overnight interest rate will be the same as the sum of the real growth rate and the inflation rate. Longer-term and riskier loans require a somewhat higher yield to compensate for inconvenience and possible losses.

The theory suffers from three crippling problems. First, it relies on hugely unrealistic assumptions about knowledge and behaviour. In particular, investors are supposed to be able to predict the future path of both inflation and growth and to calmly use their knowledge to set the risk-free rate. Any resemblance to reality is coincidental.

Economists generally defend their implausible assumptions by claiming that the theory comes up with accurate predictions. That brings up the second problem: the evidence does not firmly support this view.

A fair test of the theory is not possible before inflation rates and GDP were measured with any accuracy, sometime after World War Two in most developed economies. Since then, yields on debt of all maturities have been roughly correlated with recent inflation rates. However, the relationship is too imprecise to see if real growth rates, which have changed far less than inflation, have any influence.

Finally, even if the theory is somehow relevant, it is in practice useless. To serve as a guide to future interest rates, it requires accurate predictions of both inflation and growth. These are anybody's guess. Virtually no one predicted the rise of inflation in the 1960s and 1970s. An equally tiny group predicted the strength and length of subsequent disinflation. Central banks have been no better than outside economists. There is no reason to think the profession can do better now.

If real growth is relevant to interest rates, as the theory holds, the uncertainly is almost as great. The actual rate at which an economy expands is hard to measure and harder to predict.

In sum, the crystal ball remains totally cloudy. Predictions of low rates may be made confidently, but they are too unreliable to be taken seriously. In practice, they are basically projections that the present state of affairs – disinflation and low growth rates - will continue indefinitely.

It is certainly possible that yields on long-term government bonds will settle around 3 percent, or even lower. But the future may not be like the recent past. The global economy has surprised the experts many times in the last century. It is also quite possible that inflation will move higher, or that investors will find some other reason to push yields up. The new normal could well be 5 percent, or even higher.

Source: Reuters

Gold climbs above $1,320/oz ahead of Fed minutes

Gold prices firmed on Wednesday, climbing back above $1,320 an ounce, as fresh inflows into bullion-backed funds indicated rising investor confidence the metal ahead of the release of the latest Federal Reserve minutes.

The world's largest gold exchange-traded fund, New York-listed SPDR Gold Shares , reported a second straight session of inflows on Tuesday, taking its holdings above 800 tonnes for the first time since mid-April. [GOL/ETF]

"While physical demand remains subdued, it seems like ETF-investors continue coming back into the market ahead of today's Fed minutes," Heraeus trader Alexander Zumpfe said.

The minutes of the Federal Reserve's June meeting, due to be released at 1800 GMT, will be closely studied for clues on the outlook for Fed policy. [IDnL2N0PD14I]

Two Fed officials gave a relatively downbeat assessment of the pace of U.S. growth on Tuesday. Gold tends to benefit from such a view, as it suggests that the central bank may hold off on further reining in its gold-friendly stimulus policies.

Spot gold was up 0.3 percent at $1,322.15 an ounce by 1406 GMT, while U.S. gold futures for August delivery were up $6.90 an ounce at $1,323.40.

Prices are up nearly 10 percent this year, after tumbling in 2013 on expectations that U.S. monetary policy would gradually normalise after economic data showed signs of strengthening.

"The dovish message we've been getting out of the Fed in the face of all this stronger economic data is, in our view, the main reason why gold prices are up here," Natixis analyst Nic Brown said.

"The minutes will give a more balanced perspective in terms of what everyone on the Fed thinks," he said. "If you take the average of all the different forecasts of the Fed members, they are somewhat more hawkish as a whole than Yellen is individually. If that is the message that comes through this evening, that could be unpleasant ... for the gold market."

On the wider markets, the dollar was flat against the euro and a currency basket <.DXY> ahead of the minutes. European shares drifted lower and world stocks fell as cooling Chinese inflation overnight added to weak European industrial data earlier in the week.

Source: Reuters

JPMorgan cuts PT for BVN to US$ 19

JPMorgan cuts Price Target for Compania de Minas Buenaventura(NYSE:BVN) to US$19 from US$20
RATING OVERWEIGHT

Zinc gains 1% on forecast for shortages, global growth

 Zinc climbed about 1 percent on Wednesday as investors extended buying on forecasts of shortages of the metal due to mine closures and as a proxy for recovering global growth.

Copper prices hovered near their highest in almost five months, while aluminium touched a fresh 13-month top.

Three-month zinc was the strongest performer on the London Metal Exchange (LME), climbing 0.9 percent to $2,302 a tonne in official midday trading after touching a session high of $2,313, close to a three-year high of $2,318.50 seen on Tuesday.

Zinc has rallied 13 percent since the beginning of June as forecasts of deficits have attracted buyers, and now the circle of buyers seems to be widening, said Nic Brown, head of commodities research at Natixis.

"It may be that the improvement in zinc prices is a re-rating for commodities more generally among the investment community as we get further and further into the economic cycle," he said, noting that upbeat data recently has improved the outlook for the U.S. and Chinese economies.

"You're looking for those commodities that are moving increasingly into deficit, and of course zinc is at the top of the list."

Zinc prices caught a lift on options-related purchases, broker Triland said. "Volatility on zinc options has been well bid in recent days as upside calls for Dec. 14 in particular have been bought. This has echoes of similar strategies in nickel earlier this year."

COPPER, ALUMINIUM

The brighter growth outlook has also helped lift copper and aluminium, and news of tighter supply-demand fundamentals affected both.

Copper gained 0.4 percent to $7,156 a tonne in official rings after hitting its highest since Feb. 19 on Tuesday at $7,212 a tonne. Prices were inching towards the February top of $7,220, opening the way to levels last seen in late January, traders said.

Copper prices have rallied more than 7 percent since mid-June to above the $7,000 a tonne mark, driven by a lack of supply and a chart picture that has encouraged fresh allocation by funds.

China's moves to loosen monetary policy have also fed the copper rally, which may stretch further after Wednesday's relatively benign inflation data handed policymakers scope for fresh action, said Jonathan Barratt, chief executive of commodity research firm Barratt's Bulletin in Sydney.

"CPI lower than expected indicates support for the story of stimulus. (Premier Li) has got room and money to move. And I think that's been the core that over the last couple of weeks that has seen metals prices higher," he said.

China's consumer inflation cooled slightly more than expected in June, pointing to lingering weakness in the economy.

Dwindling copper supplies also have underpinned prices.

Chile's Codelco has asked certain buyers of refined copper in China to cancel some term shipments scheduled for delivery in the second half of the year as the firm processes less ores from a new mine, three sources said.

Among other metals, aluminium hit a new 13-month peak of $1,952 a tonne before trimming gains to $1,950 in official trading, up 0.6 percent.

Alcoa Inc has increased its estimate for the global aluminium market deficit this year due to capacity cuts in China, the world's No. 1 producer, a senior executive said on Tuesday.

Lead added 0.1 percent to $2,217 a tonnes in official rings, but nickel and tin sunk into the red. Tin shed 1.2 percent to $22,225 a tonne. Nickel, which failed to trade in official rings, was last bid down 0.9 percent at $19,600.

Source: Reuters

Corn falls for seventh session, bumper supplies drag

U.S. new-crop corn futures fell for a seventh consecutive session on Wednesday as forecasts for near perfect crop weather fuel expectations for bumper production.


FUNDAMENTALS

* Chicago Board Of Trade December corn , the most actively traded contract, fell 0.2 percent to $4.03-1/2 a bushel, to trade around the contract low. Corn slid 0.5 percent in the previous session.
* September wheat rose 0.2 percent to $5.57-1/4 a bushel, having closed up 0.1 percent on Tuesday, but is also near contract lows.
* November soybeans little changed at $11.16-1/2 a bushel, having closed down 0.8 percent on Tuesday.
* The USDA on Monday reported that the corn crop was in the best shape for early July in 15 years and that soy crop conditions were the best in 20 years.
* Market readying for Friday's monthly U.S. Department of Agriculture supply and demand report, which was expected to show higher old-crop soybean ending stocks and record-large corn and soybean harvests.
* Falling wheat prices have stirred some demand from importers, but cheaper Black Sea production has pushed U.S. wheat out of the frame in a string of tenders. Egypt's GASC, which has bought mostly Black Sea wheat in recent tenders, issued a fresh tender on Tuesday for late-August shipment.
Source: Reuters

Cleaning up coal

 According to the popular narrative, coal is locked in a fight to the death with natural gas and renewables to supply clean electrical energy.

Promoters of gas, wind and solar often talk about coal as if it were not just a rival but an enemy. Environmental campaigners want to phase out coal-fired power plants and leave most of the world’s coal reserves below ground.

Coal-fired power plants produce much higher carbon dioxide

(CO2) emissions and make the largest single contribution to global warming, so the conflict has a moral dimension.

For their part, coal producers are battling new environmental regulations which they see as a threat to the survival of their firms and communities.

All sides employ confrontational rhetoric.

In practice, however, there is no way to meet growing global demand for electricity that does not rely on large amounts of coal-fired power generation for the foreseeable future.

Cheap, abundant and widely distributed coal reserves will remain an essential component of the global energy mix for the next 50 years.

The challenge is to burn coal more cleanly, producing more electricity with fewer emissions of CO2 and other harmful pollutants.

With current technology, that outcome is possible, but it will be expensive and require heavy capital investment.


CLEAN-UP OPTIONS

In the long term, the goal is to fit coal-fired plants with carbon capture and storage (CCS) systems, which would separate nearly all the carbon dioxide from exhaust gases and trap it underground in saline aquifers and depleted oilfields. 
But while CCS has been successfully demonstrated on a small scale at various facilities, nowhere has it been implemented at a big utility-scale power plant. The engineering and commercial challenges are significant. CCS is at least a decade, and maybe two, away from being a mature commercial technology.

Gasification is another technology that could radically cut emissions. By converting coal into hydrogen and carbon monoxide, rather than burning it directly, and using these gases to drive first a jet turbine and then a steam one, the efficiency of the process can be improved enormously.

The by-product of coal gasification is a concentrated stream of carbon dioxide, which is much easier to capture and store.

Coal gasification technology is more than a century old. Modern plants that integrate gasification with combined-cycle turbine technology, however, are expensive to build and difficult to operate.

But there are other technologies already in use that could cut emissions by as much as 40 percent - mostly by improving the efficiency with which the coal is turned into steam.


RAISING STEAM

In a conventional coal-fired plant, only a third of the energy contained in the fuel is turned into electricity.

The rest is lost, mostly as heat, from the steam generator, turbines, and exhaust system as well as in the cooling water. The waste of energy is prodigious.

But it is possible to raise the thermal efficiency of a coal-fired power plant from around 33-37 percent to 40 percent or even 45 percent using fairly well-established technology.

By squeezing more electrical energy from the same amount of coal, more-efficient power plants can slash carbon emissions. Every 1 percentage point gain in thermal efficiency equates to a 2-3 percent reduction in CO2 per kilowatt-hour.

The main efficiency gains come from operating the steam generator and turbines at higher temperatures and pressures.

In a conventional sub-critical power plant, water is boiled first and then turned into steam, and the temperature of the steam is raised further in a superheater.

But in a super-critical power plant, water is converted directly to steam without passing through the boiling stage, which is much more efficient.

Thomas Edison’s first electric power plant, Pearl Street Station in New York, employed steam at a pressure of just 60-160 pounds per square inch (psi) and operated at a maximum temperature of 185 degrees Celsius.

Pearl Street Station was just 2.5 percent efficient. Since then, steam generation technology has improved enormously.

In a modern sub-critical power plant, steam pressure is below 3,200 psi and temperature is under 550 degrees Celsius.

In a super-critical plant, however, pressure is raised to over 3,500 psi and temperature to about 565 degrees.

More than 200 supercritical units were operating worldwide by 2011.

Even higher pressures and temperatures are possible. Ultra-supercritical (USC) plants have been installed that operate at 4,600 psi and 600 degrees.

Siemens , for example, has installed large ultra-supercritical steam plants in Japan, China, Germany and the Netherlands since the turn of the century.

Power plant designers now aim to build advanced ultra-supercritical (A-USC) plants that would operate at 700-730 degrees.
Source: Reuters

Japan's JX Nippon expects global refined copper deficit in 2014

The global refined copper market is expected to see a deficit in 2014, versus earlier projections of a surplus, on strong demand and lower operating rates at smelters in top producer China, the head of Japan's JX Nippon Mining & Metals Corp said.

A fifth straight year of shortage in refined metal should give legs to a recovery in benchmark copper prices , which fell almost 10 percent in the first three months this year, driven by forecasts for an uptrend in supply from mines.

"I personally expect the global copper market to stay tight throughout this year. Supply will likely be slightly short," said Shigeru Oi, the president of JX Nippon Mining, Japan's top copper refiner and a unit of JX Holdings Inc <5020.T>.

Oi, who forecast a slight delay in the ramp up of the firm's Caserones copper mine in Chile and sees metal prices rising this year by almost 11 percent from current levels, cited robust demand as a driver of the supply deficit.

"Despite the recent problem at China's Qingdao port, we've been constantly receiving enquiries from China for extra metal," Oi said in an interview, referring to a warehousing fraud investigation at Qingdao. Some investors fear the probe could prompt banks to cut credit for metals financing and curb demand.

"We've been also getting orders for additional supply from Japanese buyers on strong construction and automobile demand."

Delays in starting up new refining capacity in China and lower utilisation rate at the existing smelters in the country - the world's top consumer of the metal, are also leading to a supply crunch, Oi said.

"China's output of refined metal (this year) will be much less than everyone had anticipated," he said.

Oi's call of a deficit this year adds to a growing number of similar forecasts, partly prompted by a disruption to copper concentrate supplies from Indonesia, where a dispute between the government and miners Freeport-McMoRan and Newmont over an export tax has dragged on for months.

A senior executive at Jiangxi Copper, China's top producer of the metal, has said the global refined copper market may see a deficit of about 600,000 tonnes this year.
This is in contrast to earlier projections by Pan Pacific Copper, Japan's biggest copper smelter and a unit of JX Nippon Mining, for a global surplus of 178,000 tonnes.

The International Copper Study Group had projected a surplus of 405,000 tonnes and metals consultancy Thomson Reuters GFMS sees an excess of 352,000 tonnes.
With tight supply, copper prices are expected to stay between 320-360 cents per pound, or $7,056-$7,938 per tonne through next year, JX Nippon Mining's Oi said. London Metal Exchange copper is currently near $7,150 a tonne.


CASERONES RAMP-UP DELAYED

JX Nippon Mining, also Japan's key copper miner, will miss its 70,000 tonnes target for copper concentrate output at its Caserones mine in Chile for 2014 given a delay in the planned ramp-up due to a cold wave, Oi said.

"There has been some delay in ramp-up of Caserones due to severe cold weather. We expect to see the full utilisation rate in September, a month behind the planned August," he said.

Pan Pacific Copper (PPC) had said in June that Caserones began operations on May 31 with a plan to produce 70,000 tonnes of copper concentrate this year.
Oi, also the new president of PPC, said it will stick to its plan to produce 150,000 tonnes from Caserones in 2015, which is expected to contribute about 40 billion yen ($393.27 million) in recurring profit for the next business year to March 2016.

JX Nippon Mining is on track to post 130 billion yen in recurring profit in 2015/16, in line with the target in its current three-year business plan, Oi said.

Investors are now waiting for the firm's next project after Caserones, but Oi, who lived in Chile for 4 years, said the miner had not yet made any decision on this.

The company could invest in undeveloped mining projects, including in the region called Frontera that extends over Chile and Argentina, or buy brown-field project or mines that are already in operation, Oi said.

"We want to make a decision next business year so that we can include post-Caserones plan in the next mid-term business plan," Oi said.

Palladium climbs for 13th session to trade near 2001 highs

Palladium climbed for a 13th straight session on Wednesday to trade near its highest since 2001 on concerns over supply constraints in major producer South Africa, amid strong demand for the metal from the auto industry.

Gold was steady just below $1,320 an ounce as markets awaited the minutes of the Federal Reserve's June policy meeting to gauge the U.S. central bank's outlook for the economy and interest rates.


FUNDAMENTALS

* Palladium rose 0.4 percent to $871.05 an ounce by 0039 GMT. It hit a 13-year high of $873.75 on Tuesday.
* A five-month long strike in the South Africa, the second biggest producer of palladium, ended last month but markets continue to believe supply will be affected. The metal is mainly used in autocatalysts in automobile manufacturing.
* The metal also got a boost from data last week that showed that U.S. auto sales hit an eight-year high in June.
* Meanwhile, spot gold was little changed at $1,318.85 an ounce.
* A strong U.S. jobs report stoked fears of an earlier-than-expected rate hike in the world's largest economy. Investors will be watching minutes of the Fed policy meeting expected later today for clues on the timing of a rate hike.
* SPDR Gold Trust , the world's largest gold-backed exchange-traded fund, said its holdings rose 2.09 tonnes to 800.28 tonnes on Tuesday. [GOL/ETF]
* Dubai's Gold and Commodities Exchange could launch a spot silver contract after its first spot gold contract is offered this quarter, the company said. 

Libya's El Sharara oilfield restart another breakthrough for Tripoli

 Libya's oil sector took another big step back to normality with the restarting of an oilfield that could double its current meagre crude output, a week after blockades ended at major ports.

The 340,000 barrels per day El Sharara oilfield has resumed operations after protesters ended a four month strike, state-run National Oil Corp (NOC) said on Tuesday,

The field is in Libya's remote southwest and its connecting pipelines have been blocked several times since the autumn by protesters making financial and political demands, part of nationwide blockades of fields and oil ports.

Last week, eastern rebels handed over to the government the Ras Lanuf and Es Sider oil ports, ending an almost year-long occupation. Both terminals had accounted for 500,000 bpd.

Experts say, however, it will take time to restart production as fields and pipelines will require maintenance after standing idle so long.

Still, the restart of El Sharara and the two eastern ports give hope to the weak central government to restore vital oil production and revenue to help fight a worsening budget crisis.

Output was 327,000 bpd on Tuesday, NOC said, a fraction of the 1.4 million barrels a day the OPEC member used to pump last summer when the protests started.

"El Sharara will return to production after the pipelines were opened," said NOC spokesman Mohamed El Harari, adding that pumping had started at 1400 local time.

In May, NOC's production head Anwar Aghil said the field might take months to reach full output as at least 20 pumps inside wells need to be replaced. Operator Akakus, run by NOC and Spain's Repsol, might need up to six month to fix the pumps.

On Sunday, NOC lifted force majeure from the Ras Lanuf and Es Sider ports after rebels agreed to end a blockade. The waiver of contractual obligations was imposed last summer.

Disputes over Libya's oil resources have been among the many triggers for conflict between rival brigades of former rebels and allied political factions since civil war ended four decades of Muammar Gaddafi one-man rule in 2011.

The government and parliament in Tripoli are too weak to control heavily-armed militias which helped topple Gaddafi but now defy state authority and carve out small fiefdoms in the vast desert country.

Eastern port rebel leader Ibrahim Jathran had agreed in April to reopen two smaller eastern ports, Zueitina and Hariga, and then gradually free up Es Sider and Ras Lanuf.

After that deal, shipments from Zueitina were delayed because of damage from the blockade, while Hariga has seen only a few tanker loadings, hampered by a separate protest temporarily closing the port again.
Source: Reuters

Peripheral euro zone bond yields rise as ECB policymaker talks down QE

The yields on lower-rated euro zone bonds rose on Tuesday, as selling pressure ahead of large new debt issues picked up after a European Central Bank board member talked down the prospect of a broad-based asset-buying programme.

The ECB's Sabine Lautenschlaeger, a former Bundesbank vice president, said an asset-buying programme should only be implemented as an emergency measure if there was an immediate risk of deflation. 

Her comments show the strength of opposition in some quarters at the ECB to such a policy. Traders said they led to some selling pressure in bond markets although the impact was limited as the Bundesbank is known for its reluctance to pursue quantitative easing (QE).

"These comments are not helpful for the periphery," said Orlando Green, a fixed income strategist at Credit Agricole.

"There has been some disappointment in the market that the ECB is still playing more of a passive role with the TLTROs (new four-year loans) as they depend on banks appetite, whereas with QE it would be more active."

Spanish <ES10YT=TWEB> 10-year yields rose 4 basis points to 2.72 percent while Italian equivalents <IT10YT=TWEB> were 3 bps higher at 2.84 percent, respectively. Portuguese and Greek yields also rose.

Peripheral bonds have benefited from speculation that the ECB may be forced to fight very low inflation by printing money at some point.

But other ECB actions continue to support the market. The central bank cut all its main interest rates last month and promised up to 1 trillion euros in cheap, long-term loans to euro zone banks.

Italy and potentially Greece plan to issue bonds later in the week and traders said they were feeling some selling pressure from investors who want to make room on their books for the new paper.

Some analysts said yields should start falling again soon after the sales. German, Austrian and Dutch yields did just that after their debt auctions on Tuesday. Core bonds were also helped by a softer tone in equity markets, lifting German Bund futures to a new contract high of 147.40, up 44 ticks on the day.

Earlier, Germany sold 1 billion euros of 2018 inflation-linked bonds, Austria sold 1 billion of 10- and 30-year bonds, while the Netherlands raised 2 billion euros of 10-year bonds.

"The overriding theme is probably still the hunt for yield which should resume soon after supply," said Rainer Guntermann, rate strategist at Commerzbank.

Source: Reuters

Italy hits resistance to softer European spending rules

Italy and its allies will receive no special leeway in meeting EU budget rules, European officials agreed on Tuesday, as Germany resisted attempts to soft-pedal on long-promised spending reforms.

Italy, leading a drive for greater flexibility in the way the rules are applied to encourage economic growth and investment, has the second-highest public debt in the euro zone as a proportion of national output, after Greece.

Italian Prime Minister Mateo Renzi, pressing his campaign for greater fiscal flexibility, said all the money governments invested in broadband networks should be stripped out of the calculation of public deficits.

"Every euro spent in digital infrastructures must be out of the box," Renzi said in English at a conference in Venice. [ID:nR1N0OX00V]

Italy opened the first finance ministers' meeting of its European Union presidency by calling for "incentives" to reform after years of rigid focus on budget austerity. But Rome faced immediate resistance, including from Germany.

"Italy is delivering reforms and ... my goal is to help every country to find incentives to do reforms," Padoan said.

"If we want to see more investment we need to make the investment environment more friendly."

Padoan chairs meetings of the 28 EU finance ministers, a key forum for any change in the direction of economic policy.

Before the session began, Jeroen Dijsselbloem, head of the 18-nation Eurogroup of ministers from the single currency area, painted Italy's reform effort in an unflattering light and insisted Rome would get no special leeway.

"Competitiveness has to improve and economic growth has to pick up and lots of work needs to be done there," he said.

"Italy has been showing almost zero growth of productivity for many years and that has to improve."

Asked whether any flexibility would be given to Rome to meet its budget targets, Dijsselbloem said: "We don't do flexibility per country, we do flexibility for all of the countries."

In part of the meeting that was broadcast, German Finance Minister Wolfgang Schaeuble cautioned peers against slacking on budgets, saying that structural reforms were no alternative to reining in excess spending or "fiscal consolidation".

The European Commission also quickly pushed back.

"All expenditures must be taken into account when calculating the budget deficit," EU Economic Commissioner Siim Kallas told a news conference after the meeting of ministers.

"Can military expenditures be excluded from deficit calculations? You can imagine what would happen if this would be a possibility. Let's keep the rules," he said.


NO "FLEXIBILITY PACT"

Austrian State Secretary Jochen Danninger voiced similar scepticism. "The existing rules are to be respected to the letter," he told journalists ahead of the meeting.

"Within the framework of these rules, there is enough flexibility, so no weakening of the rules."

Italian ministers have hinted at the possibility that public investments on schools and road and rail infrastructure should also not be counted towards its budget deficit.

They have expressed worry about rules that would require Rome to reduce its overall debt level as the economy, just out of recession, is struggling to grow.

Italy's debt is projected to reach 135 percent of output at the end of the year. Under EU rules, governments have to strive to balance their books and cut public debt to 60 percent of gross domestic product within 20 years.

The ministerial debate took place as Jean-Claude Juncker, the designated president of the European Commission, began meeting political groups in the European Parliament to outline his policy programme.

The debate about whether to let governments loosen their purse strings or make them stick to austerity played a big part in his questioning by lawmakers, participants said.

In his first meeting with the Socialist group, Juncker conceded that there had been "weaknesses on the social side" in the rescue of the euro currency during the financial crisis.

He emerged from the meeting saying that a centre-left Social Democrat would probably take the powerful post of EU economic and monetary affairs commissioner, which oversees euro zone national budgets. The post has been held by centre-right liberal Olli Rehn since 2009.

The former Luxembourg prime minister and Eurogroup chairman, who has put measures to encourage growth at the centre of his agenda, is sympathetic to anti-austerity arguments.

Nonetheless, he believes there are limits to the budget leeway that can be granted and the rules should not be altered.

"The stability pact will not become the flexibility pact," he told Social Democrats, referring to the EU budget rules, according to one person present at the meeting.

"We cannot spend the money we don't have," he later told liberal lawmakers in the European Parliament. "Those who want me to say that tight fiscal discipline is over, are wrong."

Supported by the main pro-European centre-right, centre-left and liberal groups, Juncker is expected to win approval from the EU legislature in a vote on July 16.

EU leaders nominated him last month despite opposition from Britain, which depicted him as an old-guard federalist and Brussels insider, unsuited to the task of shaking up the executive body which proposes and enforces EU laws.
Source: Reuters

China's yuan global ambition faces payments hurdle

 China's quest to turn its yuan into a full-fledged global currency has hit a road-block as the planned roll-out of a worldwide payments superhighway looks certain to get delayed because of policy snags and technology challenges.

The China International Payments System (CIPS) that would replace a patchwork of networks and allow hassle-free yuan payments was meant to debut later this year, but bankers say it is unlikely to be ready before 2016.

The slippage might be good news for China's big clearing banks such as Bank of China and offshore centres such as London or Singapore, which now handle most international yuan transactions and stand to lose their privileged position.

In the long run, however, an efficient global network for yuan trades will be essential for fulfilling Beijing's wish to boost the currency's use. A spate of agreements on yuan clearing with financial centres in Europe and Asia signed over the past month or so highlighted the importance of such a system for those ambitions.

Yet government debate over how much users should be allowed to move in a single day without punching too big of a hole in China's capital controls and technological problems have stymied the system's development, bankers say.

"The central bank is telling others that the first batch of CIPS will be used this year, but we think it is unlikely," said a banker at a large Chinese bank. "The earliest will be 2016."

Bankers also worry that the roll-out won't be glitch free, and a poorly-designed system with a high transaction failure rate could put off investors.

The Chinese central bank, which leads the effort and was contacted for this article, said the building of the CIPS network was making steady progress as planned. It added that it attached "great importance" to the system, whose creation was first announced in 2012.

Eager to have a currency that matches the clout of its rising economy, China has made great strides in promoting the yuan's global use.

It is now the world's seventh most-used currency in goods and services payments, having climbed from 20th rank in 2013, according to data from international financial communications platform SWIFT.

But to attain the dollar's status as the world's reserve currency, China needs to back its yuan with a quality payment system. The dollar is supported by two -- the privately-owned CHIPS system, with an average daily transaction volume of $1.5 trillion and the Federal Reserve's Fedwire handling around $3.5 trillion.


GROWING PAINS

China's record with building its own payment system is less than stellar.

Some banks said they were given only six to eight weeks instead of the customary six months to prepare for an upgrade in the central-bank run China National Advanced Payment System, or CNAPS, causing anguish among its users.

Counter-intuitive coding for processing transactions, ambiguous regulation, heavy demands for information disclosure and the bureaucracy's poor record in software development are not a good omen for the CIPS, some bankers say.

"It is a big enough project and they underestimated the complexity of it," said the head of transaction services at a European bank in Hong Kong who declined to be named due to the sensitivity of the subject.

Troubles caused by failed transactions have made some companies consider reverting to the dollar in trade deals, foreign bankers and corporate treasurers at multinational companies say.

One foreign finance executive, who spoke on condition of anonymity, estimated that a yuan clearing transaction is two-and-a-half times more likely to fail than a dollar deal.


OBSOLETE?

Yet teething problems aside, few bankers doubt the new international network will eventually become a major long-term alternative to clearing banks and offshore centres.

Having used granting foreign cities rights to host Chinese clearing banks as a part of its diplomacy, Beijing is playing down such a scenario in public.

Last week, for instance, China and South Korea leaders agreed in Seoul on steps to create a yuan clearing system as part of efforts to strengthen commercial and diplomatic ties.
Chinese bankers say the central bank is trying to assure them that the planned global network will not dent their renminbi business. In private, however, regulators are blunt.

"There will be no need for clearing banks in the future," said an official with a Chinese regulator who declined to be named as he is not authorised to speak to the media. When asked if offshore yuan clearing centres would also become obsolete once CIPS goes live, he said the new system will provide

"alternative channels" for yuan payments.

Robert Minikin, head of Asia foreign exchange strategy at the Standard Chartered Bank in Hong Kong, says granting clearing rights for offshore centres is not so much a commitment from Beijing to preserve their privileged position, but rather a signal of its global ambitions for the yuan.

"It (the global payment system) helps create more of an even playing field for the financial centres outside mainland China."

In the meantime, any loss in clearing fees for banks and offshore centres due to competition from CIPS won't be paltry.

Daily yuan trading volumes have gone up 3-1/2 times since 2010 to $120 billion, the ninth highest, according to a Bank for International Settlements report published last September.

Luxembourg, which signed a deal with China last month that precedes the designation of a yuan clearing bank in the financial hub, is watching the payment network's progress closely.

Its finance minister Pierre Gramegna, who was in Beijing last week to mark the agreement, said he would discuss the network with Chinese authorities and "listen carefully" to what they say about the timing of its launch.

But he is optimistic that not all is lost for CIPS rivals.

"In the end, it's the market that decides," Gramegna said when asked whether clearing banks and centres will soon be irrelevant. "It's the solution that is the most efficient that players would choose."

Source: Reuters

GLOBAL MARKETS-Asian stocks slip, dollar slumps

Asian stocks fell on Wednesday after U.S. stocks skidded, while a drop in U.S. Treasury yields kept up pressure on the dollar.

MSCI's broadest index of Asia-Pacific shares outside Japan  was down about 0.2 percent in early trade, and Japan's Nikkei stock average dropped about 0.6 percent.

Traders were awaiting China inflation data at 0130 GMT for further clues on whether the economy is stabilising, ahead of its second-quarter GDP next week.

On Wall Street, major stock indexes sagged with the Standard

& Poor's 500 index shedding 0.7 percent as investors turned cautious before the start of earnings season.

The benchmark 10-year Treasuries yield slipped to 2.563 in Asia, from Tuesday's U.S. close of 2.565 percent.

Minneapolis Federal Reserve President Narayana Kocherlakota put further pressure on yields when he said the recent drop in U.S. unemployment was welcome, but the labour market still has a long way to go before the Fed reaches its goals.

Upbeat employment data for June released last week had prompted some Wall Street economists to predict the Fed would raise interest rates earlier than some previously thought. [ID:nL2N0PE1GO]

"Unlike other central banks who have recently expressed their desire to become more active, the Fed remains comfortable with their current course and has no desire to alter (the) market's expectations," Kathy Lien, managing director of FX strategy at BK Asset Management, said in a note to clients.

Later on Wednesday, the Fed will release minutes of its latest policy meeting, and ECB officials including President Mario Draghi are scheduled to speak.

Downbeat German economic data on Tuesday increased the appeal of relatively higher-yielding Treasuries, as it gave investors reason to believe that the European Central Bank could take further easing steps to support the euro zone economy.

Germany posted a larger-than-forecast drops in exports and imports in May, suggesting Europe's largest economy is showing signs of weakness.
The euro was steady in Asian trade at $1.3615 .

Against the yen, the greenback touched a fresh one-week low of 101.47 yen , which helped push down the dollar index <.DXY> slightly to 80.144 <.DXY>.

In commodities trading, U.S. oil inched up about 0.1 percent to $103.48 per barrel after slipping for eight straight sessions as global supply fears eased.
Source: Reuters

China's June PPI down 1.1 %

China's producer price index, which measures inflation at wholesale level, dropped 1.1 percent year on year in June, figures from the National Bureau of Statistics showed on Wednesday.
Source: Xinhua

China's CPI grows 2.3 % in June

 The consumer price index, a main gauge of inflation, grew 2.3 percent year on year in June, down from 2.5 percent in May, China's National Bureau of Statistics announced on Wednesday.
Source: Xinhua

Chinese President Xi Jinping stresses laws of economics in managing economy

 Chinese President Xi Jinping on Tuesday called upon governments at all levels to follow the laws of economics to achieve rational and sustainable economic development.

Xi made the remarks at a symposium on China's current economic situation.

"The development we desire must be rational and based on the laws of economics and sustainable development based on the laws of nature," Xi told the meeting after listening to opinions from some leading economists.

He said policymakers at all levels must better understand the rules of economic development to raise their capability in achieving the quality and efficiency of economic and social development.

"We should -- based on China's specific national conditions and changing situations -- speed up transformation of the economic development pattern, the restructuring of the economy and reform to let market play a decisive role in allocating resources and let government play a better role," Xi said.

The President said that China enjoys "favorable conditions" for sustained and healthy economic development.

Xi urged officials to balance reform, development and stability; short-term and long-term goals; and key points of reform and development, to increasing of people's standard of living.

Source: Xinhua

Sharp Correction of Chinese Internet ADR's

US EIA: Cuts 2014 World Oil Demnd Outlk,Raises Non-OPEC Supply

The U.S. Energy Information Administration Tuesday slashed its forecasts for how much it sees world oil demand growing in 2014, while increasing its expectation for how supply will come from non-OPEC producers this year.

The agency reported in its July Short Term Energy Outlook that U.S. oil output in 2015 will likely average its highest level in 42 years, while also raising its forecast for U.S. and international oil prices.

U.S. crude oil production is expected to increase from an estimated 7.4 million barrels per day in 2013 to 8.5 million bpd in 2014 and 9.3 million bpd in 2015. "The 2015 forecast represents the highest annual average level of oil production since 1972," the EIA said.

The EIA expects that U.S. regular-grade gasoline retail prices will average $3.66 per gallon during the current summer driving season, compared to $3.62 in June's report.

The EIA also slightly raised its forecast for the average price of retail gasoline this year, $3.54 per gallon vs. $3.50 last month.

In line with this, the report forecast that Brent crude prices will average $109.55 a barrel in 2014, up from $107.82 in last month's outlook. It is then projected to fall to $104.92 per barrel in 2015, higher than the $101.92 per barrel forecast in June.

The average forecast for WTI crude prices was $100.98 vs. $98.67 in June, then down to $95.17 in 2015.

The EIA estimates world oil consumption will grow by 1.13 million bpd to 91.62 million bpd in 2014, a downgrade from the 1.31 million bpd growth rate projected last month. World oil demand is forecast to increase further by 1.46 million bpd to 93.08 million bpd in 2015 - a faster pace compared to June's expectation of +1.33 million bpd.

As usual, non-OECD nations - particularly China - account for nearly all of the demand growth. The EIA estimates that liquid fuels consumption in China will increase by 400,000 bpd in 2014 and then up by 430,000 bpd in 2015.

On the supply side most of the projected increase is expected to come from North America, although with a slower pace of growth in 2015.

Total non-OPEC supply in 2014 is forecast to increase by 1.74 million bpd to 55.84 million bpd, an upward revision vs. supply of 55.66 million bpd forecast in June, and then by +0.97 million bpd to almost 57 million bpd next year.

Meanwhile, OPEC is expected to supply 29.59 million bpd to the oil market this year, down from 29.8 million bpd forecast in June. The EIA outlook sees the demand for OPEC oil slipping further to 29.52 million bpd in 2015.

"The escalation of violence in northern Iraq that started in June has introduced significant uncertainty into the Iraq oil production outlook," the EIA said, and it does not expect Iraq oil output to exceed 3.3 million barrels per day this year or in 2015.

However, "EIA expects Saudi Arabia to maintain a higher production level through 2014 to offset the loss of Iraq's growth," the agency said.

"In 2015, Saudi Arabia's annual production is still projected to decline to accommodate growing output in non-OPEC countries, albeit to a lesser extent than previously expected," it added.

The EIA changed its estimate for average OPEC surplus capacity in 2014 to 2.04 million barrels per day from 2.2 million bpd, and then sees an increase to 2.68 million bpd in 2015 - a sharp departure from the 3.5 million bpd forecast last month.

"The reduction in surplus capacity from last month's STEO mainly reflects increased forecast production from Saudi Arabia," EIA said.

The 2014 natural gas consumption forecast was 72.4 billon cubic feet per day, essentially unchanged from 72.5 bcf in last month's report.

"In 2015, total natural gas consumption falls by 0.3 Bcf/d as a return to near-normal winter weather contributes to lower residential and commercial consumption," the EIA said.

The report said natural gas prices averaged $4.59 per MMBtu in June, little changed vs. May, and expects spot prices to remain in that vicinity until the start of the next winter heating season.

EIA expects the Henry Hub price will average of $4.77 per MMBtu in 2014, and $4.50 per MMBtu in 2015. The 2014 and 2015 forecasts are up from $.4.74 and $4.33, respectively, in June's report.

Source: MNI