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

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

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

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

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

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

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

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

Source:Marketwatch

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

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

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

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

 The deleveraging can be done in two ways.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: Reuters

Greek deflation slows in July, trend intact

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

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

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

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

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



Reuters

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

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

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

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

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

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

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

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

Source: Reuters

Italy's economy returns to recession

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

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

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

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

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

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

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

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

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

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

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

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

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

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


REFORMS

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

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

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

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

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

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

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

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

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

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

The data did offer some encouraging signs, however.

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

Source: Reuters

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

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

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

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

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

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

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

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

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

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

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


UKRAINE CRISIS

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

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

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

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

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

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

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

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

Source: Reuters

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.""