WSJ: Defiant Putin Readies Retaliation Against Western Sanctions Over Ukraine

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Services sector activity jumps to highest level in over eight years 

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

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

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

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

Source: Schwab

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: TechCrunch

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

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

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

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

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

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

Source: Bloomberg

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

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

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

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

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

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

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

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

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

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

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

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

INTL FCStone Sees Commodities Sliding Again During August

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

Oil steady above $105 on geopolitical tension

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

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

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

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

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

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

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

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

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

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


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

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

SOURCE: Reuters

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