The MSCI Asia Pacific Index fell 0.4 percent by 11:45 a.m. in Tokyo. 05.08.14

Asian stocks dropped, with Shanghai shares retreating from the year’s highest close, and Australia’s dollar slipped as a private gauge of Chinese services industries fell to a record low. Emerging-market currencies climbed as corn and soybeans declined.

The MSCI Asia Pacific Index fell 0.4 percent by 11:45 a.m. in Tokyo. Standard & Poor’s 500 Index futures lost 0.1 percent after the U.S. gauge rebounded from its worst week since 2012. The Shanghai Composite Index decreased 0.3 percent and most Hong Kong shares declined. The Aussie weakened 0.1 percent to 93.23 U.S. cents. Malaysia’s ringgit gained 0.3 percent and Indian rupee forwards strengthened before a rates decision. Corn and soybeans lost 0.5 percent.

A purchasing managers’ index of China’s non-manufacturing sector fell to 50 in July, the borderline between expansion and contraction and the lowest reading in data from HSBC Holdings Plc and Markit Economics. Central banks in Australia and India are projected to keep interest rates unchanged today, with services data due from China to the U.K. and U.S. Tom DeMark, the developer of market indicators, said the Shanghai Composite Index will end its world-beating advance within days and fall about 10 percent.

“The Chinese PMI figures came in a bit below expectations, showing a stalling of the recent upturn in the Chinese data, so that’s putting some downward pressure on commodity currencies like the Aussie,” said Desmond Chua, a strategist at CMC Markets in Singapore. “The Aussie will remain above the 93 U.S. cents level unless we see a surprisingly bearish tone in the RBA statement.”

Bloomberg

Iraq Backs Kurdish Fight Against Jihadists

     The WSJ reports,"Prime Minister Nouri al-Maliki's authorization of air support came after the Kurdish forces, known as Peshmerga, lost a string of towns over the weekend to the militant group, which calls itself Islamic State. The Peshmerga had held off the insurgents in northwestern Iraq without central Iraqi government forces for nearly two months.

The Peshmerga's losses shocked officials, sparking new cooperation between two mutually hostile authorities—the central government in Baghdad and the Kurdish Regional Government, or KRG, in Erbil.

While Iraqi officials and analysts said they expected the security cooperation to focus on the immediate crisis, the move also could help to ease Iraq's tense political environment. Iraq's Shiite political blocs are negotiating on who to nominate as prime minister, a decision due constitutionally by Aug. 8.

Some analysts say any jointly coordinated success could also precipitate more American military support in Iraq, which both Baghdad and the Kurdish government have requested.

The new Islamic State offensive in northwest Iraq drove out thousands of residents and threatened a religious minority, the Yazidis, a small Kurdish-speaking community with a pre-Islamic faith long targeted by al Qaeda. The insurgents blew up two Yazidi shrines and rounded up some residents who hadn't managed to flee, Iraqi news agencies reported.

Iraqi Air Force jets started bombing targets in the town of Sinjar, west of Mosul near the Syrian border, and the broader area on Monday afternoon, Peshmerga spokesman Jabar Yawer said in an interview. The jets flew from and returned to Baghdad.

Monday's counteroffensive left the Kurdish fighters in control of Iraq's largest dam in Mosul, Mr. Yawer said, after Islamic State militants tried to seize it in their effort to control resources.

Iraqi and U.S. officials are concerned that any more territorial gains for the extremist group, an al Qaeda spinoff formerly known as ISIS, would help it consolidate its intended regional state.

"We have entered a new stage," said Falah Mustafa Bakir, the KRG's foreign minister, in a telephone interview. "We are on the offensive now and we need assistance to fight"Islamic State.

In a statement posted online Sunday, Islamic State called its attack against the Peshmerga an effort to "open up the border" between Nineveh province, whose capital Mosul the group seized in June, and Dohuk, the Kurdish-controlled province to its north.

Its fighters have reached "the border triangle between Iraq, Syria, and Turkey," another statement said. "May God almighty allow his mujahedeen to liberate the whole region.""

Argentina's Economy and 2015 Presidential Elections

Argentina's Economy and the 2015 Presidential Elections

JULY 11, 2014

BY JENNY MANRIQUE

There’s more than a year to go until Argentina's October 2015 presidential elections, but campaign season unofficially kicked off last October when the headquarters of National Deputy Sergio Massa (Frente Renovador, or Renewing Front party) and current Buenos Aires Mayor Mauricio Macri (Propuesta Republicana, or Republican Proposal party—PRO) erupted in joy upon hearing the results of the 2013 legislative elections.
Massa—Argentine President Cristina Fernández de Kirchner’s former ally and chief of staff—split the votes of the Peronist party and received nearly four million votes, or 44 percent of the vote (becoming one of the most-voted candidates), to secure his seat in the Chamber of Deputies on October 27. He handily beat his opponent from the traditional Peronist-affiliated party,Frente Para La Victoria (Front for Victory—FPV) catapulting himself into the spotlight as a presidential contender. Meanwhile, Macri’s PRO won 16 new seats in the legislature. Amid a festive scene that resembled a political convention in the U.S., Macri launched his candidacy for president the same night.
Meanwhile, in the bunker of the ruling FPV coalition, President Fernández de Kirchner commemorated three years since the death of her husband, former President Néstor Kirchner, and celebrated her party’s continued reign as what she called “the strongest national political force” in Argentina. Today, the president has a number of potential successors—but Daniel Scioli, the current governor of Buenos Aires province, is the most likely candidate, according to the polls.
The Frente Amplio  (Broad Front—UNEN Coalition) candidate for 2015 will be announced after the party’s primaries on August 9, 2015, when political heavyweights such as Congresswoman Elisa Carrio, former Vice President Julio Cobos, and former Minister of the Economy Martín Lousteau will compete.
Next year’s election could lead to the first presidential runoff since they were established in the Argentine Constitution in 1994. The Peronist vote will go to either Scioli or Massa, while UNEN and PRO have flirted with the idea of creating an alliance to end the 12-year period of Kirchner and Fernández de Kirchner’s government—which many economists blame for the Argentine economy’s decline.
Although macroeconomics are not hugely important for average citizens, issues like poverty, inflation and exchange rates "will be put on the public agenda by the candidates," says Diego Coatz, chief economist at the Unión Industrial Argentina (Argentine Industrial Union—UIA).
Economic representatives of Argentina’s main political forces—minus those from the FPV, who declined to comment for this article—agreed to discuss five ways the next administration should address the economy.
1. Reduce inflation.
Among the countries analyzed in the April 2014 International Monetary Fund World Economic Outlook, only 10 had inflation rates higher than 10 percent in 2013—including Argentina and Venezuela in Latin America.
According to the Fundación de Investigaciones Económicas (Economic Research Foundation—FIEL), Argentina’s inflation rate rose 2.28 percentduring the month of May, due to the government’s devaluation of the peso in January and a drop in consumption. Yet various consulting firms estimatethat annual inflation in 2014 will reach 28 percent. While the actual measurement has been controversial, many citizens nevertheless feel thedecline of purchasing power and buy black market dollars.
“Inflation is not reduced through a recession or monetary tightening, but through inflation targets agreed upon with the private sector,” said Javier González Fraga, former president of the Central Bank of Argentina and an economist from the Unión Cívica Radical (Radical Civic Union—UCR)-Frente Amplio UNEN alliance. "It may take four years to bring [inflation] down to 4 percent, but on the basis of a solid fiscal policy."
Marco Lavagna, son of former Economy Minister Roberto Lavagna and head of Massa’s economic team, said that the Fernández de Kirchner government’s devaluation of the peso is just a temporary fix for a larger problem.
"The peso was devalued without a sustainable program that looks at fiscal, monetary and exchange rate policies as a whole. The government had been doing these fixes to get to 2015—first with the unsuccessful policy of ‘Precios Cuidados’ (freezing the price of specific goods), then asking the Central Bank to print lots of money and increasing interest rates," said Lavagna. "It is important that the Central Bank has an independent president and protects the Argentine peso’s value" he said.
2. Provide clear statistics.
Due to the controversy surrounding statistics from Argentina’s Instituto Nacional de Estadística y Censos (National Institute of Statistics—INDEC) to measure indices like inflation, poverty, growth or unemployment, the future of this office will be a huge challenge for the next president. In January 2007, former President Néstor Kirchner’s office fired at least 22 employeesresponsible for INDEC’s consumer price index. Since then, there has been a growing gap between Argentina’s official and unofficial consumer prices, and the opposition argues that the official statistics on inflation and other economic indicators are no longer reliable.
The dilemma is whether the new president should review the numbers retroactively, or start with a clean slate.

"Rates must recalculate retroactively. There are treasuries paid with fake indices, and if some people have been scammed and can prove it, the state has to face the trials and the political and economic cost," said González Fraga.

For economist Coatz of the UIA, it is difficult to correct old statistics, because many distortions can be generated. However, Coatz said that it is important to understand that the numbers “should be recollected and issued by the government [rather than an independent organization], because it is a very high-cost task.”

3. Stabilize the exchange rate.

“Blue,” “green,” “pale blue,” “gray,” “stock,” “tourist,” “savings” and “official” have all become familiar terms to refer to the dollar in Argentina. This is one of the consequences of the currency exchange controls installed in 2011, which some analysts believe should be stopped in order to stabilize the foreign exchange policy.

"The government partially relaxed the restriction, allowing citizens to acquire dollars for savings—which made the gap between the official and parallel dollar drop. These measures will continue until the end of [Fernández de] Kirchner’s government, although the cost will be to slow the economy,” said analyst Federico Barani, an economist from the Instituto Tecnológico de Buenos Aires.

The PRO party argues that if the government continues to print money to finance the fiscal deficit, the exchange rate will continue rising. "The rate is not going to be low, for sure,” said Braun of the PRO. “The current market consensus talks about an official exchange rate closer to 9.5 [pesos per dollar] by year-end.”

According to the Argentine futures market Rofex, the official dollar will close at 9.29 pesos by the end of the year. Currently, the official rate is about eight pesos, while the parallel dollar about 12 pesos.

The clearest risk for devaluation is if unions demand wage increases and if more strikes occur, as they did in April. Salary negotiations in August will be another test for the government.

4. Return to the international market.

The recent agreement Argentina reached with the Paris Club of creditor nations to resume repayment of its $9.7 billion debt seems to be the first step in its return to international credit markets. Even some in the opposition recognized Economy Minister Axel Kicillof’s success in this matter. However, the U.S. Supreme Court’s rejection of Argentina’s appeal in its battle with holdout hedge funds will force the country to pay at least $1.3 billion. The Argentine government is currently negotiating a settlement with holdout creditors in New York. (Now Argentina is in default it didn't got a settlement with holdout creditors by the end of July)

"If the government manages to get funding to face debt maturities next year (which reach $10 billion), it means bringing dollars into the country, and the chances of [winning for] Scioli or any kirchnerismo candidate will increase," said Coatz of the UIA. "Otherwise, the option is to raise the rates, freezing pensions and curbing public investments—unpopular measures for the citizens”.

The next president will receive a robust economy, thanks to promising midterm investments: $15 billion for the Vaca Muerta oil field and an estimated $3.86 billion for mining projects in 2014. This scenario has turned Argentina into an attractive market for major European and U.S. multinationals, according to the latest Frontier Markets Sentiment Index.

However, the UNEN’s González Fraga recalled that in recent years, Argentina hasn’t signed any free trade agreements and instead “got stuck in Mercosur—an obstacle to integrate with Pacific countries. We must critically analyze the regional market and integrate with the world in a smarter way,” he said.

According to Marco Lavagna, another topic to address is energy policy. “In the past two years, Argentina has lost 40 percent of its Central Bank reserves due to imports of oil and gas,” he said.

"The political parties began to adhere to the 14 strategic points agreement for the future of energy policy, which has a long-term vision of 25 years,” Lavagna said, referring to a 14-point energy agreement signed so far by Sergio Massa from the Frente Renovador last May and Ernesto Sanz from the UCR in June. “The country has to give a signal of trust for the investment flows.”

5. Provide targeted subsidies.

The La Asignación Universal por Hijo (Universal Child Allowance—AUH) is a conditional cash transfer program implemented by the Fernández de Kirchner government to encourage low-income Argentine families to send their children to school. All presidential candidates have promised to maintain the program if they win the presidency.

Broadening subsidies for the population under 18—and pensions for those over 65—are policies that all presidential candidates appear to support. Nevertheless, opposition parties criticize the extended policy of subsidies for basic services that President Néstor Kirchner began in 2003 to promote consumption after the 2001 crisis. "It has ended up benefiting the wealthy, who pay monthly electricity and gas bills of less than $10 and $5 per month, respectively,” analyst Federico Barani argued.

"The 30 percent of [Argentines] living below the poverty line are the ones who should pay minimum rates for public services,” said Braun of the PRO. "The same policy should apply to taxes: more taxes on assets, and less on medium-sized businesses. To fight poverty, we need to promote investments and to develop agro-industries," he concluded.

There are many challenges for Argentina’s next president. Whoever succeeds Fernández de Kirchner in 2015 will have a chance to enact the changes outlined above and strengthen the Argentine economy.

Brent Crude Oil in longest contango since 2011

Brent crude oil steadied around $105 a barrel on Monday, close to a four-month low, as worries about oversupply outweighed concerns over violence in North Africa and the Middle East.

A supply glut in West African and European markets dragged Brent down 3.3 percent last week with the front Brent futures contract touching $104.39, its lowest since early April.

North Sea crude for immediate delivery has now been at a discount to futures in a formation called a contango for the longest period since 2011, indicating a well-supplied market.

The fall came despite conflicts in key oil producers Iraq, Libya that could disrupt oil production in future.

Brent crude was up 14 cents to $104.98 a barrel by 1400 GMT, after falling $1.18 on Friday to $104.84 a barrel, its lowest settlement since April 2.

U.S. crude crept up 2 cents to $97.90 after ending last week at its lowest settlement since Feb. 6. The U.S. contract futures fell more than 4 percent last week in the biggest weekly decline since January.

"Physical markets may be just starting to stabilise, but are still relatively weak," said Olivier Jakob at Petromatrix consultancy in Switzerland. "Brent is still in a contango."

Jakob said escalating violence in Iraq and Libya would continue to offer some support oil prices in the coming week.

"Libya is really going down the wrong way. Production has been slowly coming off," he said. "Libya could quickly return to a much lower production level."

Libya's oil output dropped to around 450,000 barrels per day (bpd), down from 500,000 bpd last week, but a spokesman for the National Oil Crop said oilfields were still secure despite clashes between rival factions in capital Tripoli.

More than 20 people had been killed in clashes around the capital on Sunday and fighting led to a huge fire raging at the city's fuel depot, as battles raged for control of the capital's airport in the worst violence since the 2011-NATO-backed civil war.

Commerzbank oil analyst Carsten Fritsch said oil prices could rise significantly if the situation deteriorated further.

"Market participants are doing an excellent job of ignoring the geopolitical risks," he said in a note to clients. "The oil market has settled into a dangerous state of complacency."

In Iraq, July oil exports increased to an average of 2.44 million barrels per day (bpd), up from 2.42 million bpd in the previous month, despite shipments from major oilfields around Kirkuk being suspended due to fierce fighting in the north of country.
Kurdish peshmerga forces said they planned a counter-offensive against Islamic State fighters who seized Ain Zalah oilfield and the country's largest dam on Sunday.

Source: Reuters

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

FUNDAMENTALS

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

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

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

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

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

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

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

MARKETS NEWS

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

Source: Reuters

Asian shares pressured by Wall St, geopolitical tensions

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


STRONGER FACTORY GROWTH

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

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

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

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

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

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

Source: Reuters

Bank of Portugal Unveils Plan to Rescue Banco Espírito Santo

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: WSJ

WSJ: Portugal Mulls Rescue for Banco Espírito Santo

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

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

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

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

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

IMFSurvey: China Would Benefit from Slower but Safer Growth

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

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

Web of vulnerabilities

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

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

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

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

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

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

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

      By Mali Chivakul

      IMF Asia and Pacific Department

Copper underpinned as Chinese factory activity gathers steam

 London copper was underpinned on Friday by expanding factory activity in China that heralded a rosier outlook for demand, soothing nerves after an overnight rout on Wall Street.

China's factory sector posted its strongest growth in 18 months in July as new orders surged to multi-month highs, a private survey showed, adding to signs the economy is regaining momentum helped by a spate of stimulus measures. 
"Consumption in China is starting to pick up and inventories are starting to draw down ... I like the look of copper because I think this demand will push us into a deficit sooner than we think," said Jonathan Barratt, chief investment officer at Ayers Alliance Securities in Sydney.

Three-month copper on the London Metal Exchange edged down but by just 0.1 percent to $7,105 a tonne by 0246 GMT, after finishing the prior session little changed. Copper gained for a third month in a row in July, with a 1.4 percent advance.

The most traded October copper contract on the Shanghai Futures Exchange slipped by 0.2 percent to 50,330 yuan

($8,200) a tonne.

Investors were in no mood to take risks after Argentina, Latin America's No. 3 economy, defaulted on its sovereign debt for the second time in 12 years following the failure of last-ditch talks with holdout creditors. [ID:nL6N0Q64AV]

That triggered a sell-off on Wall Street, adding to pressure from month-end proft-taking.

An improving outlook for the U.S. economy should brighten demand for metals, but at the same time it raises the risk that the Federal Reserve will raise interest rates sooner, which would act as a brake on further gains, Barratt said.

Another worry for markets is cooling growth in China's property sector, which the International Monetary Fund flagged this week.

A number of small developers - the kind that by sheer weight of numbers dominate China's vast property sector - are set to report big drops in earnings or even losses as the industry grapples with tight credit, sluggish sales and excess supply.

In other metals, LME zinc , the top performer in July with a gain of 6.5 percent, eased 0.3 percent to $2,352.50 a tonne.

LME nickel logged the biggest advance at 0.6 percent, paring 2.4 percent losses the session before. It has risen 34 percent this year on prospects of renewed appetite from stainless steel makers amid tight supply after Indonesia banned ore exports in January.

Stainless steel maker Aperam beat profit expectations in the second quarter, saying on Thursday that the market was clearly picking up, with improved conditions in Europe. 

Brent holds near $106 after ample supply pulls down prices

 Brent crude held near $106 a barrel on Friday as ample supply continued to drag on prices a day after the benchmark posted its worst monthly performance since April 2013.

Analysts expect global production to exceed demand this year, while a supply glut has built up in Africa and Europe.

Brent crude was flat at $106.02 a barrel by 0322 GMT after a 5.6 percent drop in prices last month.

U.S. crude futures for September delivery fell 13 cents to $98.04 a barrel, following a 6.8 percent decline last month, the biggest monthly loss since May 2012.

"Suddenly, people wake up and realise that even with the geopolitical risks in the world there is this surplus of physical crude," said Tony Nunan, a senior risk manager at Mitsubishi Corp.

Still, Brent's forward prices have risen substantially on worries about longer term oil output in Iraq and Libya, he said.

OPEC's second largest producer Iraq is battling an Islamic insurgency in the north. The conflict threatens to split the country, but has yet to have an impact on near-record oil exports from the south.
Baghdad is also embroiled in a dispute with Iraqi Kurdistan over oil exports via Turkey.

Production at another OPEC producer Libya remained way below the more than 1 million bpd that it was pumping in 2012 before protests curbed output and exports.

Given the overall supply situation, normally there would be a steeper fall in oil prices, Nunan said. "But the reason we're not is because OPEC has so many geopolitical issues."

Energy investments in Russia also faced delays after sanctions imposed by the United States and European Union limited access to funds.

The spread between Brent and West Texas Intermediate (WTI) has stretched to near $8 a barrel on closure of a refinery that is a major consumer of WTI crude.

CVR Refining said on Thursday that its 115,000-barrel-per-day Coffeyville, Kansas, refinery, could be down four weeks after a July 29 fire in the facility's isomerization unit. 
Source: Reuters

Global equity markets tumbled on Thursday.Several geopolitical tensions and Argentina's default drived risk-off trade

 Global equity markets tumbled on Thursday, hurt by ongoing tensions with Russia and Argentina's second default in 12 years, while the U.S. dollar edged higher against a basket of major currencies for its strongest monthly gain in over a year.

Wall Street was hit hard, with the Dow and the S&P 500 posting their first monthly decline since January, while the Nasdaq fell for a third month in the last five.

The benchmark S&P 500 index closed below its 50-day moving average for the first time since April 15 and posted its biggest one-day percentage decline since April 10. The moving average is viewed as a sign of short-term momentum, and selling accelerated after the level was breached.

"It’s getting pretty ugly," said Peter Kenny, chief market strategist at Clearpool Group in New York.

"This is really a blending of several geopolitical themes that are driving that risk-off trade. Whether it is Ukraine/Russia crisis, whether it is Israel/Gaza, whether it is Argentine default - you pick the theme, but if you put them all together - it is providing the type of headwind that is making people more inclined to take money off the table than put it to work."

The Dow Jones industrial average <.DJI> fell 317.06 points, or 1.88 percent, to end at 16,563.3. The S&P 500 <.SPX> lost 39.4 points, or 2 percent, to 1,930.67 and the Nasdaq Composite <.IXIC> dropped 93.13 points, or 2.09 percent, to 4,369.77.

MSCI's All-World Index <.MIWD00000PUS> was down 1.5 percent and European shares <.FTEU1> fell 1.2 percent.

Russia banned soy imports from Ukraine and may restrict Greek fruit and U.S. poultry, Russian news agencies reported on Thursday, in what could be responses to new Western sanctions. [ID:nL6N0Q54VL]

Separately, Argentina defaulted for the second time in 12 years. Investors had hoped for a midnight deal with holdout creditors, but the plan fell through. Even a short default will raise companies' borrowing costs, add to pressure on the peso, drain dwindling foreign reserves and fuel one of the world's highest inflation rates. [ID:nL6N0Q60RM]

Most U.S. Treasuries were steady, overcoming earlier price losses, as investors sought lower-risk debt for month-end rebalancing.

U.S. government debt has weakened since gross domestic product data on Wednesday showed a strong rebound in the second quarter from a weak start to the year.

That extended into Thursday morning as data showed U.S. labor costs recorded their largest increase in more than 5-1/2 years in the second quarter, a sign that a long-awaited acceleration in wage growth was imminent. Debt prices stabilized, however, as some investors shifted out of stocks and into bonds to adjust month-end balance sheets.

Benchmark 10-year notes were little changed to yield 2.56 percent, after earlier rising as high as 2.61 percent, the highest since July 8.

The U.S. dollar index <.DXY>, which measures the dollar against a basket of six major currencies, was last up 0.03 percent at 81.460. The index posted its biggest monthly gain in nearly 1-1/2 years, rising more than 2 percent in July.

Source: Reuters

China July factory activity strongest in 18 months, adds to recovery signs

China's factories posted their strongest growth in at least 1-1/2 years in July as new orders surged to multi-month highs, two surveys showed on Friday, cementing bets that the economy is re-gaining momentum after a spate of stimulus measures.

The official Purchasing Managers' Index (PMI) issued by the government climbed to a 27-month high of 51.7 in July, beating forecasts for 51.4.

A separate PMI published by HSBC/Markit also rose to 51.7, its best performance in 18 months.

A reading above 50 indicates an expansion in activity on a monthly basis, and below that a contraction.

Analysts welcomed the data as a sign that the world's second-biggest economy is enjoying a revival after a rocky spell prompted authorities to launch a volley of support measures, including increasing bank lending to spur growth.

Now that looser monetary policy is having its intended effect, some analysts questioned the need for more economic stimulus in China, at least in the near term.

"There is no reason in China to be concerned about growth right now," said Julian Evans-Pritchard, an economist at Capital Economics. "It's a good time for policymakers to step back from stimulus and concentrate on reforms."

Both surveys showed that the rebound in manufacturing was led by firmer domestic demand as new orders -- a proxy for domestic and overseas demand -- rose more sharply than new export orders.

The official PMI showed new orders jumped to 53.6 from June's 52.8, the best reading since May 2012. The HSBC/Markit PMI also showed the new orders sub-index jumping nearly two points to 53.3, a level last seen in March 2013.

Worried by a slowdown in the economy in the first quarter, China began easing policy in April by cutting taxes, hastening investment, and lowering the reserve requirement for some banks.

Bank lending, which is controlled by the government, is expected this year to hit levels unseen since the 2008/09 global financial crisis.

All of this should help China sustain its economic recovery, said Qu Hongbin, an analyst at HSBC.

"We expect the cumulative impact of these measures to filter through in the next few months and help consolidate the recovery,” he said.


"LIKELY TO MEET GROWTH TARGET"

China's economy has had a rocky spell this year.

Growth cooled to an 18-month low of 7.4 percent in the first quarter, and it was only after the flurry of policy support that activity edged back up to 7.5 percent between April and June, in line with the government's 2014 GDP expansion target.

And what started as a slowdown largely driven by unsteady foreign and domestic demand and investment has broadened to include a housing downturn, which in recent months has become the biggest threat to the economy.

Average home prices fell in May for the first time in two years, while growth in land prices also slowed for the first time in two years in the second quarter.

Although a retreat in the once-heated housing market is a welcome for Chinese since home prices are still near record highs, the cooldown is painful for policymakers since the sector accounts for roughly 15 percent of China's economic growth.

Some economists say the economic recovery still hinges on the magnitude of China's pro-growth steps, and whether the government can successfully curb the risks stemming from a cooling property sector.

Indeed, in a sign that the recovery may still be patchy, a sub-index for employment in the HSBC/Markit PMI showed employment contracted for the ninth consecutive month in July as some companies laid off workers.

Premier Li Keqiang also said on Thursday that China has to work harder on reforming its economy in the northeastern region, where growth has lagged after regional governments cut state investment to re-orient the Chinese growth engine. 
Following three decades of double-digit economic growth, China wants to re-make its maturing economy so that it relies not on investment and exports, but on domestic consumption for sustainable growth.

"Future policy depends on whether the cost of funding in China would continue to fall," said Zhou Hao, an economist at ANZ Bank in Shanghai.

"But it's clear that China's economic growth momentum has increased and it's very likely that this year's 7.5 percent growth target will be met."
Source: Reuters