Stocks end mixed as investors eye Fed rate call

Wall Street, which is riding a four-week winning streak, kicked off a busy week quietly Monday as it awaited a slew of earnings releases, fresh data on the economy and a Federal Reserve meeting on interest rates.

The Standard & Poor’s 500 stock index, which gained 2.1% last week on the heels of a interest rate by the Bank of China and hints of more stimulus ahead from the European Central Bank, closed down 0.2%.

The Dow Jones industrial average ended down 0.1% and the Nasdaq composite inched up less than 0.1%.

This week, traders will digest earnings reports from 169 companies in the S&P 500, according to earnings-tracker Thomson Reuters. The third-quarter earnings picture, so far, has been better than expected.

Seven out of 10 companies have topped profit forecasts, and while earnings are still expected to contract 2.8% this quarter for the first time since 2009, that’s better than the projections of earnings falling more than 4% at the start of the earnings season.

Today’s earnings releases are expected from 10 companies in the S&P 500. Well-known companies such as Xerox (XRX)and Broadcom (BRCM) report.

But the major market-moving earnings reports don’t kick in until Tuesday, when iPhone maker Apple (AAPL), automaker Ford (F), drug makers Merck (MRK) and Pfizer (PFE) and package delivery giant UPS (UPS) report.

Heading into the week, the S&P 500 was up 0.8% for the year but still down 2.6% from its May 21 record close of 2130.82.

economyCopyright: USA Today 

Is this the death of America’s middle class?

When Barack Obama made his State of the Union speech in January this year, one phrase kept coming up again and again: middle class. The concept is a part of America’s DNA, with many in the country arguing that a strong middle class boosts economic growth and investment.

But fewer Americans than before are identifying as middle class. In 2008, according toresearch from Pew, 58% of people in the US did. Five years later, that had dropped to 49%.

They might be on to something. This year, according to a new report from Credit Suisse, China’s middle class overtook America’s for the first time, becoming the largest in the world. “The middle class is so closely associated with North America – and the United States in particular – that some of our results for individual countries may come as a surprise,” the report’s authors note.

Here are the numbers of middle-class adults (in millions), by region and country (2015):

Although China has the world’s largest middle class, this social segment still makes up a rather small part of its population: just 10.7%, compared with 37.7% for the US. But while America’s percentage might look good compared with its Asian rival, it is in fact low for a developed country. In Australia, for example, 66.1% of the population are middle class. In the UK that figure stands at 57.4% and in Canada 47.8%.

What’s more, the middle class in China (and Asia more widely) will continue to grow: “The middle class will continue to expand in emerging economies overall, with a lion’s share of that growth to occur in Asia,” the report concluded.

Copyright: World Economic Forum

Death of America’s middle class

Oil prices slip on Chinese demand concerns, weak Saudi exports

Oil prices fell on Monday on concerns about the pace of economic growth in China, the world’s largest energy consumer, and signs that global oversupply is curbing Saudi crude exports.

China’s economy grew at the slowest pace in six years in the third quarter, according to official data released on Monday, making it more and more likely Beijing will cut interest rates to stoke activity.

Brent for December delivery LCOc1 was down 38 cents at $50.08 a barrel at 0807 GMT. U.S. crude for November delivery CLc1 traded down 35 cents at $46.91 a barrel, extending last week’s steepest losses in eight weeks.

“Chinese GDP data and the rise in the Saudi stockpile due to falling crude oil exports are weighing on prices,” said Tamas Varga, oil analyst at London brokerage PVM Oil Associates.

Saudi Arabia, the world’s biggest crude exporter, shipped 278,000 barrels a day less crude oil in August, trade data showed, suggesting demand for Saudi oil is sliding as the global supply glut persists.

Meanwhile Austrian oil producer OMV lowered its oil price forecasts on Monday, seeing 2016 prices at $55 a barrel and rising to $70 a barrel in 2017, $80 a barrel in 2018 and $85 a barrel from 2019 onwards.

As a result the company also said it would take a 1 billion-euro impairment charge on asset values in its upstream business.

Investors were also eyeing progress in the removal of western sanctions on Iran that will allow the oil-rich nation to revamp oil production and resume exports to western consumers.

The United States and the European Union on Sunday took formal legal steps to lift sanctions on Iran once Tehran meets the conditions tied to a landmark nuclear agreement with major world powers. 

Copyright: Reuters

Gas pipeline in Wyoming

Gas pipeline in Wyoming

Transparency is Key to Improving the Outlook for Mexico’s Deepwater Block Auction, says GlobalData Analyst

As Mexico’s first offshore bidding round for already discovered fields saw bids significantly higher than the minimum set up by the government, adding further transparency to the process would be positive for the round as it approaches its deepwater phase, according to an analyst with research and consulting firm GlobalData.

Adrian Lara, GlobalData’s Senior Upstream Analyst for the Americas, says that the Mexican government’s announcement of the minimum profit oil worked out well, especially in discovered fields, as opposed to the disappointment surrounding the exploration blocks on offer during the previous phase of Round 1.The minimum for Area 1 of this second phase was established at 34.8% and the bids ranged from 46.7% to 86.7%. GlobalData’s assessments suggest that assuming a price of $60 per barrel, these fields would be profitable with bids of up to 65%. Four of the nine bids were above this threshold, and two were significantly higher.

The size of the winning bid indicates that competition drove bidding higher because the floor was known. The previous phase also involved determining the potential floor for bidding, which could have led to negative bidding strategies designed to minimize outlay.

Lara comments: “So far, the particular design of Round 1 with its phases has functioned well, as it incorporates lessons learned in the previous phase.

“The success of the last phase, for example, was in part due to the failures of the first phase, namely that not disclosing the minimum adds uncertainty to the geological risk and ultimately lowers the incentive to bid high, or even bid at all.”

While GlobalData believes that the most promising deepwater prospects are the three discoveries Trion, Exploratus and Maximino being offered by Pemex as farm-outs, bidding activity in the next deepwater exploration block phase could be positively impacted if at least the framework for the farm-out agreements is released.

Lara explains: “Building on the premise that disclosing the minimum decreased uncertainty and added a degree of transparency to the process, it would be positive for the next phase if CNH provided more transparency on the terms of the farm-outs.

“This would provide a more comprehensive perspective on the final deepwater phase of the Round 1 and finally set an optimistic precedent for future bidding rounds,” the analyst concludes.

Copyright: Global Data

Round 3 MEXICO

US Shale Firms Snap Up $50 Oil Hedges, Risking Rally Reversal

Welcome to the oil market’s new vicious cycle.

This past week, as oil prices barrelled over 9 percent higher to break out of a weeks-long trading range, U.S. shale producers jumped at the chance to lock in $50-plus crude for the first time in months, making up for lost time after holding off hedging during the market’s late-summer slump.

U.S. crude oil futures for December 2016 delivery, a favored contract for hedgers, saw trading volume spike to a weekly record high of nearly 190 million barrels, twice as much as the average for the previous four weeks, in what market sources and industry executives said was the biggest wave of hedging since a fleeting rush in late August.

The price premium for the Dec 2016 contract against the same month in 2015 has shrunk to just $4 a barrel, down from more than $7 a barrel two months ago, due partly to forward selling.

Oil producers’ rapid response to the latest move upward comes in contrast to the second quarter, when a moderate price recovery was met with only modest hedging interest as many executives bet – wrongly – that the worst was already behind them.

It also highlights the far more precarious financial position for many shale firms facing rapidly tightening credit conditions, expiring legacy hedges and a deepening fear that prices may stay much lower for much longer than they thought.

For some, hedging is now less an insurance policy than a lifeline as those who have scrimped on protection watched with despair oil prices shuffling between $43 and $48 for six weeks.

Yet their activity also threatens to undermine one of the fundamental reasons for oil’s gains: falling U.S. output.

In addition to creating immediate headwinds by selling into the rally, drillers whose future profits are insured with new hedges will be better able to keep on pumping oil, adding to a global oversupply, the thinking goes.

“Any little rally ends up getting suffocated by the new production it unleashes,” said Vikas Dwivedi, Houston-based global oil and gas strategist at Macquarie Group.

Underhedged, Overtaxed

The push-pull between current prices and future production highlights a new normal for oil markets, in which the short-run cycles of the agile U.S. shale sector have replaced OPEC as the world’s swing supplier. The $50 hedges also illustrate how shale firms have been able to keep drilling at lower and lower costs thanks to efficiency gains and focus on the most productive spots; a year ago, break-even costs were seen nearer $70.

As a result, producers are moving more quickly than ever to catch what may be a fleeting price recovery.

In a push that started Tuesday and continued through Friday, U.S. producers have locked in new production in greater volumes for 2016 and 2017, according to three market participants who watch money flows.

Copyright: Rigzone

US Shale

Russia, Saudi Energy Ministers Discussed Oil Demand, Production, Shale

Russia and Saudi Arabia discussed the situation on the oil market last week and agreed to continue consultations, exchanging views on demand, production and shale oil, Russian Energy Minister Alexander Novak told reporters on Tuesday.

Even though the oil price has halved since last year on oversupply, Russia, the world’s top oil producer, has refused to cooperate with OPEC, where Saudi Arabia is the leading producer.

Both OPEC and Russia are instead increasing production in a move to defend market share.

Novak did say on Saturday that Russia was ready to meet with OPEC and non-OPEC producers to discuss the market and his comments have supported prices, although analysts have warned that relations may suffer over the two sides’ different positions on Syrian President Bashar al-Assad’s future.

Novak, who was in Turkey last week for a G20 energy ministers meeting, said he did not see a risk that relations between Russia and Saudi Arabia would worsen and said he had discussed global oil markets with Saudi Oil Minister Ali al-Naimi.

“We discussed the situation on the market in Istanbul, held consultations, exchanged views on demand, production, the shale oil revolution, (and) agreed to continue consultations,” Novak said.

Novak added that a meeting of the Russia-Saudi Arabia intergovernmental commission was scheduled for the end of October or the beginning of November.

OPEC’s Secretary-General Abdullah al-Badri said on Tuesday that the oil exporter group should work together with producers outside OPEC to tackle the oil surplus in the global market.

Novak’s first deputy, Alexei Texler, said last week that Russia would stick to its plans not to cooperate with OPEC.

Copyright: Rigzone

RUSSIA, PRODUCTION, SHALE

Is China Really Collapsing?

A widely held Western view of China is that its stunning economic success contains the seeds of imminent collapse. This is a kind of anchoring bias, which colors academic and think-tank views of the country, as well as stories in the media. In this analysis, China appears to have an economy unlike others—the normal rules of development haven’t been followed, and behavior is irrational at best, criminal at worst.

There’s no question, of course, that China’s slowdown is both real and important for the global economy. But news events like this year’s stock-market plunge and the yuan’s devaluation versus the dollar reinforce the refrain, among a chorus of China watchers, that the country’s long flirtation with disaster has finally ended, as predicted, in tears. Meanwhile, Chinese officials, worried about political blowback, are said to ignore advice from outside experts on heading off further turmoil and to be paranoid about criticism.

My experience working and living in China for the past three decades suggests that this one-dimensional view is far from reality. Doubts about China’s future regularly ebb and flow. In what follows, I challenge five common assumptions.

 

1. China has been faking it.

A key tenet of the China-meltdown thesis is that the country has simply not established the basis for a sustainable economy. It is said to lack a competitive, dynamic private-enterprise structure and to have captured most of the value possible from cheap labor and heavy foreign investment already.

Clearly, China lacks some elements of a modern market economy—for example, the legal system falls short of the support for property rights in advanced countries. Nonetheless, as China-economy scholar Nicholas Lardy recently pointed out, the private sector is vibrant and tracing an upward trend line. The share of state – owned enterprises in industrial output continues to drop steadily, from 78% in 1978 to 26% in 2011. Private industry far outstrips the value added in the state sector, and lending to private players is growing rapidly.

 

In fact, much of China’s development model mirrors that of other industrializing and urbanizing economies in Asia and elsewhere. The high savings rate, initial investments in heavy industries and manufacturing, and efforts to guide and stabilize a rapidly industrializing and urbanizing economy, for example, resemble the policies that Japan, South Korea, and Taiwan followed at a similar stage of their development. This investment-led model can lead to its own problems, as Japan’s experience over the past 20 years indicates. Still, a willingness to intervene pragmatically in the market doesn’t imply backwardness or economic management that’s heedless of its impact on neighboring economies and global partners.

Furthermore, China’s reform initiatives since 2013 are direct responses to the structural changes in the economy. The new policies aim to spur higher-value exports, to target vibrant emerging markets, to open many sectors for private investors, and to promote consumption-led growth rooted in rising middle-class incomes. Today, consumption continues to go up faster than GDP, and investors have recently piled into sectors from water treatment to e-commerce. These reforms are continuing at the same time China is stepping up its anticorruption drive, and the government hasn’t resorted to massive investment spending (as it did in 2008). That shows just how important the reforms are.

2. China’s economy lacks the capacity to innovate.

Think tanks, academics, and journalists alike maintain that China has, at best, a weak capacity to innovate—the lifeblood of a modern economy. They usually argue as well that the educational system stomps out creativity.

My work with multinationals keen on partnering with innovative Chinese companies suggests that there’s no shortage of local players with a strong creative streak. A recent McKinsey Global Institute (MGI) study describes areas where innovation is flourishing here. Process innovations are propelling competitive advantage and growth for many manufacturers. Innovation is at the heart of the success of companies in sectors adapting to fast-changing consumer needs, so digital leaders like Alibaba (e-commerce) and Xiaomi (smartphones) are emerging as top global contenders. Heavy investment in R&D—China ranks number two globally in overall spending—and over a million science and engineering graduates a year are helping to establish important beachheads in science- and engineering-based innovation.

3. China’s environmental degradation is at the point of no return.

To believe this, you need to think that the Chinese are content with a dirty environment and lack the financial muscle to clean things up. O.K., they got things wrong in the first place, but so did most countries moving from an agrarian to an industrial economy.

China is spending heavily on abatement efforts, as well. The nation’s Airborne Pollution Prevention and Control Action Plan, mandating reductions in coal use and emissions, has earmarked an estimaated $277 billion to target regions with the heaviest pollution.That’s just one of several policy efforts to limit coal’s dominance in the economy and to encourage cleaner energy supplies. My interactions with leaders of Chinese cities have shown me that many of them incorporate strict environmental targets into their economic master plans.

4. Unproductive investment and rising debt fuels China’s rapid growth.

To believe this, you would have to think, as many skeptics do, that the Chinese economy is fundamentally driven by overbuilding—too many roads, bridges, and buildings. In fact, as one economist has noted, this is a misperception created by the fact that the country is just very big. An eye-popping statistic is illustrative: in 2013, China consumed 25 times more cement than the U.S. economy did, on average, from 1985 to 2010. But adjusted for per-capita consumption and global construction patterns, China’s use is pretty much in line with that of South Korea and Taiwan during their economic booms.

China’s rising debt, of course, continues to raise alarms. In fact, rather than deleveraging since the onset of the financial crisis, China has seen its total debt quadruple, to $28.2 trillion last year, a recent MGI study found. Nearly half of the debt is directly or indirectly related to real estate (prices have risen by 60% since 2008). Local governments too have borrowed heavily in their rush to finance major infrastructure projects.

While the borrowing does border on recklessness, China’s government has plenty of financial capacity to weather a crisis. According to MGI research, state debt hovers at only 55% of GDP, substantially lower than it is in much of the West. A recent analysis of China’s financial sector shows that even in the worst case—if credit write-offs reached unprecedented levels—only a fairly narrow segment of Chinese financial institutions would endure severe damage. And while growth would surely slow, in all likelihood the overall economy wouldn’t seize up.

Finally, the stock-market slide is less significant than the recent global hysteria suggests. The government holds 60% of the market cap of Chinese companies. Moreover, the stock market represents only a small portion of their capital funding. And remember, it went up by 150% before coming down by 40.

Rumors drive the volatility on China’s stock exchange, often in anticipation of trading by state entities. The upshot is that the direct impact on the real economy will most likely be some reduction in consumer demand from people who have lost money trading in shares.

5. Social inequities and disenfranchised people threaten stability.

On this one, I agree with the bears, but it’s not just China that must worry about the problem. While economic growth has benefited the vast majority of the population, the gap between the countryside and the cities is increasing as urban wealth accelerates. There’s also a widening breach within urban areas—the rich are growing richer.

Urban inequality and a lack of access to education and healthcare are not problems unique to China. People here and in the West may find fruitful opportunities to exchange ideas because the pattern across Western economies is similar. Leaders of the central government have suggested policies to improve income distribution and to create a fair and sustainable social-security system, though implementation remains a matter for localities and varies greatly among them.

In short, China’s growth is slower, but weighing the evidence I have seen, the sky isn’t falling. Adjustment and reform are the hallmarks of a stable and responsive economy—particularly in volatile times.

Copyright: Forbes

china economy