Sweet Futures – Squawk Trader (09-29-14)

Published on 09-29-2014

U.S. pending home sales fall more than expected in August.

Contracts to purchase previously owned U.S. homes fell more than expected in August, pointing to a still shaky housing sector. The National Association of Realtors said today its Pending Home Sales Index, based on contracts signed last month, fell 1.0 percent to 104.7. Economists polled by Reuters had expected a decline of just 0.1 percent. Despite the drop, pending sales were still at the second-highest level of the year. In July, sales had risen 3.2 percent, a touch softer than the previously reported 3.3 percent gain. The index plunged last year after mortgage interest rates spiked, but have been on a rising trend since this past March. Contracts signed last month declined in all major regions, except in the West, where they rose for a fourth straight month, the NAR said.

WTI Crude Set for Biggest Loss in a Week With Brent

West Texas Intermediate crude headed for its biggest loss in a week as U.S. economic data bolstered the outlook for higher interest rates. Brent declined in London amid concern Chinese demand is slowing. Futures dropped as much as 0.9 percent in New York and 0.8 percent in London. Both grades were heading for their biggest quarterly loss in more than two years. The dollar traded near its highest closing level against the euro in more than two years, curbing the appeal of commodities, amid speculation the Federal Reserve will increase interest rates. Gauges of Chinese manufacturing are due tomorrow and on Oct. 1, and U.S. payrolls data will be released on Oct. 3. “It will be a very heavy week in macro data,” Olivier Jakob, managing director at consultants Petromatrix GmbH in Zug, Switzerland. “China is not a strong story. For financial investors, the Fed moving out of quantitative easing does not call for investment in commodities,” he said by e-mail. WTI for November delivery slid as much as 80 cents to $92.74 a barrel in electronic trading on the New York Mercantile Exchange and was at $93.22. The contract climbed $1.01 to $93.54 on Sept. 26, the highest close since Sept. 17. The volume of all futures traded was about 15 percent below the 100-day average for the time of day. Prices have lost 12 percent in the past three months, the biggest quarterly drop since June 2012. Brent for November settlement decreased as much as 73 cents to $96.27 a barrel on the London-based ICE Futures Europe exchange. The European benchmark crude traded at a premium of $3.52 to WTI on ICE, near the narrowest in more than a year. Brent has lost 14 percent this quarter.

U.S. Economy:

The U.S. dollar was at $1.2706 per euro, near the Sept. 26 closing price of $1.2684 that was the lowest since Sept. 6, 2012. Gross domestic product advanced at a revised 4.6 percent annualized rate in the second quarter, up from a previous estimate of 4.2 percent, the Commerce Department reported on Sept. 26. The U.S. payrolls report on Oct. 3 will probably show companies added 215,000 workers in September, up from 140,000 in August, according to a Bloomberg survey. “The dollar making some additional gains, oversupplied oil markets,” are the reasons behind oil’s slide today, Ole Sloth Hansen, an analyst at Saxo Bank A/S in Oslo, said by e-mail. “Only a dollar sell-off or correction stands in the way of a test of $95 on Brent.”

China Data:

In China, the official Purchasing Managers Index on Oct. 1 is estimated to show a slowdown to 51, compared with 51.1 previously, according to a Bloomberg survey, as a downturn in the real estate sector damps domestic demand. Aircraft from the U.S., Saudi Arabia and the United Arab Emirates attacked four modular refineries in Syria controlled by Islamic State over the weekend, U.S. Central Command said in an e-mailed statement yesterday. A command post north of Raqqah in Syria was attacked, while a safe house and checkpoints were destroyed in Iraq. The U.S.-led campaign in Syria follows bombings in Iraq against Islamic State that started last month. The fighting has largely spared the south of Iraq, home to three quarters of oil output from the second-biggest producer in the Organization of Petroleum Exporting Countries. Hedge-fund managers and other large speculators reduced net-long positions on WTI by 4.8 percent to 193,965 contracts in the week ended Sept. 23, according to data from the U.S. Commodity Futures Trading Commission. Bullish bets on Brent crude were cut by the most in a month, according to ICE data. Long positions outnumbered bets that prices would fall by 43,559 lots for the same week, the lowest since June 2012, the data show. WTI’s decline represents “a good time to make long positions again” as the U.S. economy shows signs of recovery, said Ken Hasegawa, an energy trading manager at Newedge in Tokyo, said by phone. WTI has technical resistance along its 30-day middle Bollinger Band, data compiled by Bloomberg show. Futures have halted intraday gains since mid-September near this indicator, at about $93.60 a barrel today. Sell orders tend to be clustered around chart-resistance levels.

Incoming EU econ commissioner talks tough on budget discipline.

The European Commission will not let EU budget discipline rules be flouted, incoming economic affairs commissioner Pierre Moscovici said on Monday, days after his former colleagues in the French government said Paris would again miss EU targets. Last year, European Union finance ministers gave Paris an extra two years to bring its budget deficit below the EU ceiling of 3 percent of national output after France missed a 2013 deadline in what is called the ‘excessive deficit procedure’. But earlier this month the French government said it would not meet the new 2015 deadline either and instead would reduce its budget shortfall below 3 percent only in 2017. Moscovici, who was finance minister for two years until April, is due to take office in Brussels on Nov. 1, subject to a confirmation hearing on Thursday in the European Parliament. He will be responsible for upholding EU budget discipline rules but his nationality has made some EU lawmakers, notably Germans concerned about fiscal laxity in the euro zone, wary that he might be inclined to show undue leniency towards France.

In written answers to European Parliament questions, published on Monday, Moscovici sought to dispel such worries. “Acting as an agent in the interest of the European economy as a whole, the Commission cannot accept that a member state in the excessive deficit procedure does not fulfil its duty vis-à-vis the other member states,” Moscovici said. “Should a member state fail to take the necessary ‘effective action’ to comply with the recommendations set by the (European)Council … the Commission would propose to the Council to apply the rules.” The Council groups the EU’s 28 national governments. Taking effective action usually means that a government reduces its budget gap in structural terms, which means excluding the effects of the business cycle and one-off items by the amount requested by EU ministers. The European Union asked France in June 2013 to reduce its budget gap in structural terms by 1.3 percent of GDP in 2013 and by 0.8 percent in both 2014 and 2015. But in March 2014 the EU Commission said France had cut its shortfall only by 1.1 percent in 2013 and would have achieved only 0.6 percent in 2014.

France’s 2015 budget, due to be presented on Wednesday, will be important because it may still step up the structural deficit reduction next year and in this way raise the overall average closer to the targets set by the EU. But Les Echos daily reported today that France was planning only a 0.25 percent of GDP reduction in the structural deficit next year – well short of the 0.8 percent target. If EU finance ministers decide that France has not taken the effective action they requested, they can step up the procedure against Paris by giving it notice. If Paris were to ignore even that, it could be fined.

Consumer Spending in U.S. Climbed in August on Income Gain.

Consumer spending in the U.S. rebounded in August as further job gains encouraged households to loosen their purse strings. Purchases increased 0.5 percent last month after little change in July, Commerce Department figures showed today in Washington. The median forecast of economists in a Bloomberg survey called for a 0.4 percent gain. Incomes increased 0.3 percent. Employers are cutting back on dismissals and adding to headcounts, helping underpin sentiment and sustaining the purchases that make up almost 70 percent of the economy. Bigger wage gains would help provide an additional push and propel sales at companies such as Dunkin’ Brands Group Inc. (DNKN) and Hooker Furniture Corp. “The consumer looks to be in a fairly healthy position,” said Robert Stein, deputy chief economist at First Trust Portfolios LP in Wheaton, Illinois, and the second-best forecaster of consumer spending over the last two years, according to data compiled by Bloomberg. “The labor market is the key behind the income growth that we’re seeing.” Forecasts for spending in the Bloomberg survey ranged from increases of 0.2 percent to 0.6 percent after a previously reported July decline of 0.1 percent. The gain in incomes (PITLCHNG) matched the Bloomberg survey median and followed a 0.2 percent increase a month earlier.

Inflation Adjusted:

Today’s consumption data showed that after adjusting consumer spending for inflation, which generates the figures used to calculate gross domestic product, purchases increased 0.5 percent last month, the most since March, after a 0.1 percent drop in July. Spending on durable goods, including automobiles, increased 1.9 percent after adjusting for inflation, the most in five months, following a 0.1 percent gain. Purchases of non-durable goods, which include gasoline and clothing, rose 0.3 percent. Vehicle purchases remain a source of strength for the economy. Sales of cars and light trucks rose to a 17.5 million annualized rate in August, the highest since January 2006, from a 16.4 million pace a month earlier, according to data from Ward’s Automotive Group. Household outlays on services increased 0.4 percent after adjusting for inflation. In addition to health care, the category also includes utilities, tourism, legal help and personal care items such as haircuts. This typically makes it difficult for the government to estimate accurately in the preliminary report.

Disposable Income:

Disposable income, or the money left over after taxes, rose 0.3 percent in August after adjusting for inflation. It increased 0.1 percent in the prior month and was up 2.7 percent from August 2013. The saving rate fell to 5.4 percent last month from 5.6 percent in July. Wages and salaries increased 0.4 percent, the most in three months. A report last week showed the U.S. economy expanded in the second quarter at the fastest rate since the last three months of 2011, as companies stepped up investment and households boosted spending. Gross domestic product climbed at a revised 4.6 percent annualized rate, up from a previous estimate of 4.2 percent, Commerce Department data showed. Today’s report also showed that prices tied to consumer spending rose 1.5 percent in the year ended August. Federal Reserve policy makers aim for price increases of 2 percent a year.

Core Inflation:

The core price measure, which excludes fuel and food, rose 0.1 percent in August from the prior month and was up 1.5 percent from a year ago. Some value-focused companies, such as Dunkin’ Brands, have faced tough competition in the low-price environment as consumers seek out the best bargains. The first half of the year was “challenging,” with middling consumer confidence and tight household budgets, while competitors gave “away key product categories free for weeks on time,” John Costello, president of the coffee and ice cream franchise’s marketing and innovation, said at a Sept. 17 investor and analyst meeting. The Canton, Massachusetts-based company said it expects third-quarter U.S. same store sales for the coffee chain to increase by as much as 2.25 percent, less than what analysts had estimated, according to data compiled by Bloomberg. “We’ve seen some competition get very aggressive and so our franchisees have done a really great job of holding the line on price,” he said. “We also have strong plans for the second half of the year and there are plans that will really carry through into 2015 and beyond.”

Furniture Sales:

More gains in the housing industry will help Martinsville, Virginia-based Hooker Furniture (HOFT), which is “encouraged” about prospects for fall business, Chief Executive Officer Paul Toms said on a Sept. 10 conference call. “Economically, the fundamentals are in place for an improved housing market, and consumer confidence continues to strengthen,” he said. Federal Reserve policy makers are looking for continued progress in the economy as they outline a strategy to exit from six years of unprecedented easing. Policy makers tapered monthly bond buying this month to $15 billion in their seventh consecutive $10 billion cut, according to the policy statement after the Federal Open Market Committee’s meeting in Washington. “The labor market has yet to fully recover,” Fed Chair Janet Yellen said at a press conference following the meeting. “There are still too many people who want jobs but can’t find them.” Meanwhile, “inflation has been running below the committee’s 2 percent objective,” she also said.

Europe Stocks Fall as Banks Drop Amid Hong Kong Protests.

A decline in bank shares led European stocks lower, with HSBC Holdings Plc weighing on the benchmark index amid pro-democracy protests in Hong Kong. HSBC and Standard Chartered Plc slid at least 1.8 percent each as they shuttered some Hong Kong branches as protesters stayed on the streets after clashes with police. Commerzbank AG fell 4.2 percent after a person with knowledge of the matter said the lender faces a U.S. inquiry into whether it broke anti-money-laundering laws. Balfour Beatty Plc slid 19 percent after signaling the outlook for construction earnings has worsened. The Stoxx Europe 600 Index decreased 0.3 percent to 341.24 in London, extending losses after a final reading showed euro-area economic confidence declined this month. The benchmark gauge retreated 1.8 percent last week as investors assessed the health of the euro-area economy and central-bank stimulus policies. “The European economy keeps weakening, and the overall business climate is weighing on the market,” Otto Waser, chief investment officer at R&A Research & Asset Management AG in Zurich, said by telephone. “The demonstrations in Hong Kong add to uncertainty.” National benchmark indexes fell in 14 of 18 western-European markets. Germany’s DAX Index lost 0.4 percent, France’s CAC Index slid 0.4 percent, and the U.K.’s FTSE 100 Index dropped 0.2 percent. The VStoxx Index, which measures expected volatility on the Euro Stoxx 50 Index using options prices, rose 6.5 percent to 18.743, its highest level since Aug. 15. The volume of shares changing hands in Stoxx 600-listed companies was 24 percent lower than the 30-day average for this time of day, according to data compiled by Bloomberg.

Euro Confidence:

Economic confidence within the euro area diminished in September. An index of executive and consumer sentiment slipped to 99.9 from 100.6 in August, the European Commission in Brussels said today. That’s the lowest since November. Investors are also watching U.S. economic data for indications as to the timing of an increase in interest rates. Consumer spending in the U.S. rebounded in August, Commerce Department figures showed today in Washington. Purchases increased 0.5 percent last month after little change in July. The median forecast of economists in a Bloomberg survey called for a 0.4 percent gain. Incomes increased 0.3 percent. A report from the National Association of Realtors at 10 a.m. Washington time may show a pending home-sales index slipped 0.5 percent in August following a 3.3 percent gain in July.

Banks Decline:

A gauge of bank-related stocks posted the biggest decline of the 19 industry groups in the Stoxx 600, losing 1.3 percent. HSBC, which got 19 percent of its profit from Hong Kong in 2013, fell 1.8 percent to 638.3 pence. The London-based bank closed its branch in the Mong Kok district, which is one of the city’s most densely populated areas, after protests unexpectedly spread beyond the main island. Standard Chartered fell 2.2 percent to 1,148.5 pence after saying that operations were temporarily suspended at five branches. Commerzbank slid 4.2 percent to 11.72 euros. The German lender seeking to resolve a probe into Iran sanctions violations also faces a U.S. inquiry into whether it broke anti-money-laundering laws, according to a person with knowledge of the situation.

Balfour Beatty:

Balfour Beatty (BBY) tumbled 19 percent to 183.1 pence. Britain’s biggest builder said U.K. construction-services profit will fall by an additional 75 million pounds ($121 million) this year. That brings the estimated drop at the unit to 140 million pounds. While earnings at the rest of the company remain in line with expectations, Balfour didn’t comment on its overall forecast. The builder also said Chairman and interim Chief Executive Officer Steve Marshall plans to leave once successors to both his posts have been found. RWE AG dropped 3.2 percent to 30.48 euros. Germany’s largest power producer said a plan to sell its RWE Dea oil and gas unit to Russian tycoon Mikhail Fridman’s LetterOne investment group has been delayed as a U.K. regulator has yet to approve the deal. UBS AG advanced 0.7 percent to 16.81 Swiss francs, paring earlier gains of as much as 1.4 percent. Switzerland’s largest bank said profit for July and August is already ahead of estimates for the full third quarter. Earnings in the two months totaled 731 million francs ($767 million). That is ahead of the 713 million-franc third-quarter net income average estimate of five analysts surveyed by Bloomberg.

The Cost of Putin’s Economic U-Turn.

When U.K. Prime Minister Tony Blair became the first leader of a major economy to meet Russia’s new president in March 2000, Vladimir Putin couldn’t have been more gracious. Accompanied by their wives, Putin showed Blair around the Hermitage museum in his hometown of St. Petersburg. At the Mariinsky Theater, they watched an operatic version of “War and Peace.” Blair praised Putin for seeking to modernize his economy and make it more open to foreign investment. Putin the week before had mentioned the idea of Russia joining the North Atlantic Treaty Organization. The Russian leader initially lived up to expectations as he reduced taxes and pushed entry into the World Trade Organization. Markets rallied and foreign investors poured in, driving the Micex Index of stocks up 12-fold in Putin’s first two terms, before the financial crisis hit in 2008. The ruble rose 12 percent in the same period. Those days are now consigned to what might have been. Putin began turning away from his new friends as early as 2003, and accelerated the retreat as his third term in the Kremlin got under way in 2012. He cracked down on dissidents, curbed economic freedoms and, this year, fomented the rebellion in eastern Ukraine. The result: Russia, now bordering on recession, suffers mounting international sanctions and, increasingly, is a pariah in capital markets. While the MSCI World Index of equities is up 9.7 percent from a year ago, the Micex is down 2.9 percent. The ruble, which today reached a record low, has fallen 30 percent since Putin first became president.

‘Wasted Moment’

“There will be long-term damage to Russia,” Michael McFaul, until February U.S. ambassador to the country and now a professor at Stanford University in California, said in a telephone interview. “That’s a great wasted moment because Russia was on such a different trajectory. It’s just a tragedy for all that Putin went off in a different direction.” For what could have been, look no further than the $2 trillion economy, which expanded an oil-powered average of about 7 percent from 2000 to 2008. As Putin resumed the presidency in 2012, the International Monetary Fund was predicting growth of 3.9 percent in 2013. Instead it was 1.3 percent, an undershoot equivalent to about $50 billion. A similar shortfall is forecast for this year, according to Anders Aslund, a senior fellow at the Peterson Institute for International Economics in Washington, who advised Russia on privatization in the 1990s. Even worse, Alexei Kudrin, who as finance minister from 2000 to 2011 helped return Russia’s budget to surplus, said Sept. 16 that his country will post zero or negative growth for the next two to three years.

Weaker Path:

“The engagement with Ukraine has put the economy on a far weaker growth path,” said Charles Collyns, chief economist at the Institute of International Finance in Washington and a former U.S. Treasury official. Global investors withdrew about $850 million from Russian bond and stock funds in the year through Sept. 24, according to data compiled by EPFR Global in Cambridge, Massachusetts. Economy Minister Alexei Ulyukayev said on Sept. 18 that this month’s arrest of billionaire Vladimir Evtushenkov could lead to increased capital flight. Business people are signaling flight as well. Where once they rubbed elbows with Putin at the St. Petersburg Economic Forum, the chief executive officers of Goldman Sachs Group Inc. and Citigroup Inc. were among those to skip the gathering in May of this year. New York-based Blackstone Group LP stopped seeking investments in the country after the private-equity firm failed to strike a deal in three years of trying, said a person with knowledge of the plan.

Business Ease:

Putin’s dream of making Russia one of the world’s five biggest economies by 2020 is now in ruins, according to Sergei Guriev, a former economic adviser to Prime Minister Dmitry Medvedev who fled to Paris last year. He says it could have been achieved had Putin focused on delivering economic growth of 5 percent to 6 percent as promised. “Russia had such a massive potential because of its inefficiencies that it was perfectly feasible to achieve this rate of economic growth,” said Guriev. “What changed is that the government decided not to fulfill its promises.” The sentiment was different in 2000, when Putin replaced Boris Yeltsin. One of his early acts was to close Russia’s radar base in Cuba, the only intelligence-gathering center it had in the Western Hemisphere. He also shut a naval base in Vietnam, its biggest outside Warsaw Pact countries. After the Sept. 11 attacks, Putin pledged unconditional support for the U.S.

Tax Cuts:

Domestically, he cut income taxes to a flat rate of 13 percent from a maximum of 30 percent and reduced corporate taxes to 24 percent from 35 percent. Budget revenue surged. “That was a completely different life and Putin behaved completely differently,” said Mikhail Kasyanov, who was prime minister during Putin’s first term and is now an opposition leader. Putin’s embrace of capitalism was never a full one. In 2000 he wrested control of NTV, a leading independent TV station owned by an oligarch, Vladimir Gusinsky, and in 2003 Mikhail Khodorkovsky, head of Yukos Oil Co., was arrested on charges of money-laundering and tax evasion. After 10 years in prison, he was freed last year by presidential pardon. Ties with the U.S. began deteriorating further during President George W. Bush’s 2003 invasion of Iraq and Russia’s opposition to U.S. missile defense plans in eastern Europe.

Reset Button:

When President Barack Obama arrived at the White House, he sought a “reset” in relations. Secretary of State Hillary Clinton offered Foreign Minister Sergei Lavrov a toy box with a large red button when she visited Moscow in 2009. The U.S. even supported Russia’s entry to the WTO. The make-up didn’t last. Putin offered asylum to fugitive American government intelligence contractor Edward Snowden in August 2013 and Russia defied the U.S. in shoring up the regime of Syrian President Bashar al-Assad. Then came Ukraine and the Cold War-style standoff. The overthrow of Russian-backed President Viktor Yanukovych in February marked the culmination of years of Kremlin frustration at NATO’s steady encroachment on former Soviet territory. Vladimir Lukin, Russia’s ambassador to the U.S. in the early 1990s, says Putin isn’t solely to blame for the state of affairs. The U.S. and the European Union must bear some responsibility for the “persistent and unilateral expansion” of NATO, and then the EU, towards Russia’s borders, he said. “Putin was picked partly to stand up to the West, so the guy we got is partly a product of those decisions,” said Tony Brenton, U.K. Ambassador to Russia from 2004 to 2008.

Sanctions Impact:

U.S. and EU sanctions might be biting more deeply after the U.S. expanded them to encompass OAO Sberbank (SBER), the country’s largest bank, and energy companies as well as five state-owned defense and technology companies. “These sanctions are limiting his ability to implement those projects he needs to imitate normal economic growth in Russia,” said Kasyanov, the onetime prime minister. “Sanctions should speed up the collapse of the whole economic system, which would lead to a deep, systemic crisis.” While the ruble and Russian stocks gained in recent days on the hope sanctions may be eased and the ceasefire maintained, Benoit Anne of Societe Generale SA expects further selloffs. “I don’t know many international investors that are currently bullish on ruble assets,” he wrote in a Sept. 24 report. “These are either bearish, for the large part, or have decided to stay away altogether.” Guriev, the former prime ministerial adviser, says plans for a balanced budget also are predicated on economic growth of 2 percent to 3 percent. With that now in jeopardy he predicts Putin will soon have to shrink spending on military and pensions as a falling oil price provides another fiscal challenge. “This is an entirely new thing and we don’t know what will happen,” said Guriev. “It’s unprecedented for Putin.”

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