China’s economic speed bump may reignite bond default wave

China had unexpected buoyancy in its economy to thank for an easing off in corporate defaults in the first half. But as growth shows signs of pulling back, the question is: will it last?

Despite alarm over the risks posed by China’s daunting debt pile ticking up in the first six months of the year, the country actually saw a drop in corporate distress, with 0.27 percent of issuers defaulting, versus 0.55 percent in all of 2016, according to China Lianhe Credit Rating Co. Goldman Sachs Group Inc., too, saw Chinese company leverage drop in the first half.

Economists including Raymond Yeung at Australia & New Zealand Banking Group Ltd. put the improvement down to the economy, which seemed to turn a corner in late-2016. Growth accelerated in the fourth and first quarters, the first successive gains in seven years, which bolstered company earnings, says Yeung.

“The macroeconomic conditions are much more favorable to Chinese corporates compared with the same time last year,” Yeung said in an interview in Hong Kong. “However, this cyclical adjustment will still face a limit. It is still too early to call the improvement a trend.”

Disappointing data

And cracks may already be forming.

Data Monday showed growth in both retail sales and factory output slackened in July, coming in weaker than economists had anticipated. In the same Aug. 4 research note in which they detailed the decline in corporate leverage, Goldman analysts including Asian credit research chief, Kenneth Ho, said defaults could pick up “as the pace of growth in the second half of 2017 slows.”

Bloomberg Intelligence also sees economic momentum ebbing, read more here.

Beijing’s campaign to reduce overcapacity and re-orient the $11 trillion economy away from industrial and low-end manufacturing drivers has helped fuel profit growth this year, says Xia Le, chief Asia economist at Banco Bilbao Vizcaya Argentaria SA in Hong Kong.

But it’s “unimaginable” that the government will persist with the reform program while ignoring how it is affecting downstream industries, he said. “That’s why I expect profit growth to slow down.”

Profit growth

China’s industrial profits have had a good run, growing 19.1 percent in June. The move to cut capacity has helped bolster commodity prices such as coal, steel and cement, and the recovery in those sectors — which saw the most bond defaults over the past two years — means banks’ asset quality is improving, Goldman analysts wrote in a note dated Aug. 3.

After the second-quarter read on Chinese gross domestic product came in better than expected, analysts boosted their forecasts for the coming quarters. The world’s second-largest economy will grow 6.7 percent this year, from a previous forecast of 6.6 percent, according to a survey conducted July 17-24.

“Low housing inventory, recovering private investment, and a strong infrastructure pipeline suggest that economic growth will remain robust for the foreseeable future,” said Frederic Neumann, co-head of Asian economics at HSBC Holdings Plc in Hong Kong. “Over the longer term, a further improvement of corporate fundamentals will not only depend on stable demand and cash flow, but also on structural reforms to raise productivity growth.”

Builder defaults

Bloomberg calculations put the number of corporate bond defaults at 14 in the first half, versus 17 in the same period of 2016. For the second half, the tally is already at five defaults, with Wuyang Construction Group Co. failing to pay back some principal and interest on an 800 million yuan bond puttable, which in turn triggered its default on a 560 million yuan note, according to a filing on Monday.

ANZ’s Yeung says the stronger yuan also underpinned company profits and helped stave off defaults by mitigating foreign-currency losses. The currency has gained 3.3 percent versus the dollar over the past three months but forecasters still expect it to weaken from current levels by the end of the year.

China’s property sector is also losing steam, which could underpin a wider economic pullback — read more here.

Jenny Zeng, a Hong Kong-based portfolio manager and head of credit research for Asian fixed income at AllianceBernstein Holding LP, is worried about the refinancing factor.

Chinese firms will see 3.1 trillion yuan ($465 billion) of local debt mature next year, on top of the record 5.2 trillion yuan coming due in 2017, data compiled by Bloomberg show.

“We are yet to see better earnings translating into better cash flow,” she said, adding refinancing was a “key risk” faced by private companies in China going in to next year.

 

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Oil ends sharply higher, with U.S. prices down a third week in a row

Oil prices shifted higher Friday, jumping about 3% in a surprise rally for the session on the back of unconfirmed reports of a unit shutdown at one of the largest oil refineries in the U.S., as well as data showing a weekly fall in the number of active domestic oil rigs.

According to some news reporters, a unit at Exxon Mobil Corp.’s XOM, +0.01% Baytown, Texas refinery has been closed. MarketWatch, however, has been unable to reach a spokesperson by phone to confirm.

“This is a monster refinery—the second largest oil refinery in the United States,” said Phil Flynn, senior market analyst at Price Futures Group, adding that it has a capacity of 584,000 barrels a day. “The loss [according to the unconfirmed reports] of this refinery may have others scrambling to make up the difference, raising the bid on heavy oil that is getting a bit more difficult to find.”

James Williams, energy economist at WTRG, meanwhile, noted that the market may have experienced volatility linked to the coming expiration of the September futures contracts. Tuesday is the last day of trading for the September West Texas Intermediate futures contract.

And Tariq Zahir, managing member at Tyche Capital Advisors, said the late-morning rally for oil followed a shift in U.S. equities, which came on the heels of “drama” in Washington, D.C. The White House on Friday said Stephen Bannon, will leave his position as President Donald Trump’s chief strategist.

“Some weekly short positions could have been liquidating, accelerating a rally as well,” said Zahir. But “as long as [WTI] crude hits resistance near $50, we believe this $45-$50 range will be tight through the end of summer.”

Prices had traded lower earlier in the session, pressured by recent data showing a rise in U.S. crude production to its highest level in more than two years.

West Texas Intermediate crude for September delivery CLU7, +3.48%  jumped $1.42, or 3%, to settle at $48.51 a barrel after trading as low as $46.78. The contract, which expires at Tuesday’s settlement, cut its loss for the week to 0.6%, FactSet data show.

September gasoline RBU7, +2.27%  also rose 3.7 cents, or 2.3%, to $1.624 a gallon, with prices turning higher by 0.7% for the week.

October Brent LCOV7, +3.59%  on London’s ICE exchange rallied $1.69, or 3.3%, to $52.72 a barrel. It erased its loss for the week and gained 1.2% from last Friday’s finish.

The Energy Information Administration on Wednesday reported a drop in weekly U.S. crude supplies that was the largest since September of last year, but it also said production rose for the week to its highest level since mid-July 2015.

On Friday, Baker Hughes BHGE, -0.09%  reported a weekly decline in the number of active U.S. rigs drilling for oil—a key metric for drilling activity. It fell 5 to 763 rigs this week.

Back on Nymex, September heating oil HOU7, +2.67%  rose 3.8 cents, or 2.4%, to $1.620 a gallon, but ending around 0.9% lower on the week.

September natural gas NGU17, -1.50%  declined 3.6 cents, or 1.2%, to $2.893 per million British thermal units. It was down about 3% for the week.

 

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Dollar ends the week mixed as investors digest White House news

The U.S. dollar pared losses Friday after it was revealed White House chief strategist Steve Bannon would be leaving the administration.

The dollar had weakened Thursday in a selloff that followed a deadly terror attack in Barcelona and amid continued turmoil surrounding the White House.

The ICE Dollar Index DXY, -0.27% which measures the buck against a basket of six currencies, hit an intraday high of 93.608 before retreating to 93.4060 late on Friday in New York. On the week, the index gained 0.4%.

The broader WSJ dollar index BUXX, -0.29% which compares the greenback to 16 other currencies, was 0.3% lower at 86.11, down 0.2% on the week.

The intraday strength in the dollar was surprising, Viraj Patel, FX strategist at ING suggested, stressing how difficult it was to predict reactions to headlines from Washington. “The theme this week is that the dollar has turned into a sell on Trump,” he continued. “But then you see the Bannon news and it appears dollar positive.”

Investors made a run for haven currencies perceived as safer late on Thursday and through Friday morning. The buck USDJPY, -0.32% fell against the Japanese yen, hitting 109.16 late on Friday, leaving it more or less unchanged on the week.

The greenback grew stronger against the Swiss franc USDCHF, +0.1557%  as the day went on, with one dollar buying 0.9658 francs, representing a 0.4% gain week on week.

On Thursday, the White House announced that its council on infrastructure had also been disbanded, making it the third advisory group composed of private-sector leaders to bite the dust in the wake of the president’s comments about violence that occurred at a white supremacist rally in Charlottesville, Va., last weekend.

Heightened political tensions in the U.S. could be important for investors, argued Marc Chandler, chief strategist at Brown Brothers Harriman, in a note on Friday: “Up until now, it seemed that the leadership of the large U.S. companies were willing to work with the new president, despite his unorthodox ways.”

In more positive news, the University of Michigan consumer sentiment gauge for August beat estimates and the prior month’s figure, reading 97.6 compared with forecasts of 94 and a level of 93.4 in July.

The euro EURUSD, +0.3156%  strengthened on the back of a downtrend in the dollar, buying $1.1762. The eurozone currency slipped on Thursday as minutes from the European Central Bank’s July meeting revealed policy makers debated adjusting its guidance but then decided against it to avoid sending the wrong signal. On the week, the euro dropped 0.5% against the dollar, falling back below the $1.18 threshold.

Meanwhile in the U.K., the pound GBPUSD, +0.0622% ended the day slightly stronger at $1.2876, shedding 1% on the week.

Elsewhere, the Canadian consumer-price index for July undercut expectations, though not by much, at 1.2% on the year versus estimates of 1.3%. The inflation indicator rose nonetheless from 1% the previous month.

Core inflation, excluding volatile components and taxes, rose 0.86%, below the consensus forecast of 1.5%.

The U.S. dollar slipped 0.8% against its Northern neighbor USDCAD, -0.7727% with one dollar buying C$1.2578 versus C$1.268 last Friday, representing a 0.8% drop.

The Bank of Canada is next due to meet on September 6, although a potential rate increase is not expected until October given that the central bank raised interest rates in July, Chandler said.

 

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Oil prices tiptoe higher after EIA-fueled selloff

Oil prices tiptoed higher Thursday, attempting to recoup some of the losses they suffered a day earlier, as traders continued to weigh data showing the biggest weekly fall in U.S. crude supplies in 11 months, but also the highest total domestic production level in more than two years.

Thursday’s move higher is “likely just technical buying interest after breaking below the $47 support level” Wednesday, said Troy Vincent, oil analyst at ClipperData. “Fundamentally speaking, although U.S. crude stocks are set to continue to drop through August, there has been no bullish news since yesterday’s report.”

On the New York Mercantile Exchange, September West Texas Intermediate crudeCLU7, +0.24%  added 20 cents, or 0.5%, to $46.98 a barrel after spending time swinging between small gains and losses. October Brent crude LCOV7, +0.86%   on London’s ICE Futures added 53 cents, or 1%, to $50.80 a barrel.

September gasoline RBU7, +0.15% meanwhile, traded up by less than half a cent at $1.567 a gallon, while September heating oil HOU7, -0.21%  shed under half a penny to $1.572 a gallon.

Oil’s latest moves come after WTI and Brent crude tumbled Wednesday, as investors focused more on the climb in average daily U.S. oil production to its highest since July 2015, instead of the drop in crude inventories, which was the largest weekly fall since September of last year.

The Energy Information Administration reported on Wednesday a rise of 79,000 barrels a day in total crude-oil production to 9.502 million barrels a day last week. The EIA, however, also said that oil inventories fell by 8.9 million barrels, more than double the decline expected by analysts polled by S&P Global Platts.

The Organization of the Petroleum Exporting Countries and the global production-cap agreement has “faded to the back burner, as the resilient trend of U.S. production continues to keep a lid on prices,” said Tyler Richey, co-editor of the Sevens Report.

‘Barring any geopolitical catalysts, $50 [for WTI] will likely remain a stubborn resistance level in the near term.’

Tyler Richey, Sevens Report

“Barring any geopolitical catalysts, $50 [for WTI] will likely remain a stubborn resistance level in the near term, and if production continues to grind higher in the U.S., expect prices to remain under pressure,” he said in its latest report.

OPEC and a group of non-cartel countries led by Russia have agreed to cut oil production through March next year in an effort to rebalance the oil market that has been suffering from a global supply glut in recent years. However, recent data showed OPEC production rose in July because of weaker compliance with the accord, as well as a resurgence in output in Libya and Nigeria—which are exempt from the pact because their oil industries have been disrupted by civil unrest.

There’s also concerns that the OPEC-led cuts are incentivizing other oil producing nations, like the U.S., to ramp up output to gain market share.

Elsewhere in energy trading, prices for natural gas headed higher as traders parsed through the latest EIA report on supplies of the fuel.

The EIA said U.S. supplies of natural gas rose by 53 billion cubic feet for the week ended Aug. 11. The data, however, included revisions to figures for previous weeks tied to a reclassification of natural gas in storage from working gas to base gas. Read the EIA report for details

On average, analysts were looking for a build of 47 billion cubic feet, according to commodity brokerage firm iiTRADER.

September natural gas NGU17, +1.25%  traded at $2.911 per million British thermal units, up 2.1 cents, or 0.7%.

 

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Gold marches higher as haven demand persists after Trump dissolves councils

Gold prices continued higher Thursday, boosted by haven demand after U.S. President Donald Trump disbanded two business councils and minutes from the Federal Reserve’s meeting last month pointed to concerns over sluggish inflation.

“The weak bond market, combined with the overpriced equities and housing, indicate inflation is rearing its ugly head—and it could be accelerated with the geopolitical uncertainty in Washington,” said Jeb Handwerger, editor of GoldStockTrades.com, which focuses on mining exploration companies. He referred to the president as “a golden swan to precious metal and commodity investors who love uncertainty and volatility.”

If gold breaks through $1,300 an ounce, he expects “a move to test decade highs made in 2011 at $1,900.

On Thursday, gold for December GCZ7, +0.67%  picked up $7.80, or 0.6%, to $1,290.60 an ounce, off their best levels intraday, but building on a 0.3% advance from Wednesday.

Analysts at Commerzbank said the metal was sent higher in late trade on Wednesday as the dollar suffered after Trump said he had dissolved two advisory councils following mounting pressure from high-profile CEOs. Trump has faced heavy criticism after he repeatedly blamed “both sides” for violence last weekend at a white supremacist rally in Charlottesville, Va.

“This quashes the initially big hopes that Trump could pursue a business-friendly policy. Ultimately, this could even prove damaging to the U.S. economy,” Commerzbank analysts said.

A weaker dollar tends to send metals, such as gold higher, because the commodity becomes cheaper for other currency holders to purchase. The greenback, however, strengthened a bit Thursday, with the ICE U.S. Dollar Index DXY, +0.17%  up 0.1%.

Gold also benefited from dovish minutes from the Fed’s July meeting.

“As expected, the minutes of the latest meeting of the U.S. Federal Reserve gave no indication as to how the Fed might proceed in future. What they did show was the lack of consensus within the Fed, however. The biggest bone of contention is the inflation expectation in the U.S.,” the Commerzbank analysts.

Gold prices usually fall when interest rates go up, because the metal becomes less attractive compared with assets that offer yields.

In other metals, silver for September SIU7, +0.62%  was up 1.1% at $17.12 per ounce. Palladium for the same month PAU7, +2.08%  rose 2% to $928.05 an ounce, while platinum for October PLV7, +0.71%  edged 0.7% higher to $980.90 an ounce.

September high grade copper HGU7, -0.51%  lost 0.5% to $2.94 a pound, easing back from a 2.5% jump on Wednesday.

Among exchange-traded funds, the SPDR Gold Trust GLD, +0.31%  added 0.4%, while the iShares Silver Trust SLV, -0.31%  rose 0.3%. The VanEck Vectors Gold Miners ETF GDX, -0.09%  tacked on 0.3%.

 

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Private equity follows the money

This article was written by Gillian Tan. It appeared first on the Bloomberg Terminal.

Private equity firms are continuing to diversify away from, well, private equity.

On Wednesday, Bloomberg News reported that Advent International is planning a move into debt investing and is in the early stages of forming a team to then raise a dedicated fund. The news comes just weeks after tech-focused buyout specialist Thoma Bravo confirmed in a filing that said it’s seeking to raise $750 million for its first fund dedicated to credit investing, joining others in the industry that already have thriving debt businesses.

By expanding into new areas like credit, private equity firms can generate more income from their existing customer base of sovereign wealth fund, pension fund, endowments and family offices — all of which have a seemingly bottomless pit of capital to deploy. These investors have in recent years tried to whittle down the number of relationships they maintain and are super-receptive to new products with different risk and return profiles — such as a debt of infrastructure fund — managed by firms they’ve long allocated capital to for private equity investments.

That dynamic has helped transform the industry’s giants into alternative asset managers. Three of the six largest publicly-traded firms — Apollo Global Management LLC, Ares Management LP and Oaktree Capital Group LLC — have credit businesses that dwarfs their other units. And Blackstone Group LP’s real estate arm has eclipsed private equity unit for a while now.

Given this, it’s curious in some ways that it’s taken this long for Advent and Thoma Bravo, which manage $39 billion and $17 billion respectively, to make the leap into credit. Start-up costs are light: All they need to do is hire a handful of debt experts and once a fund is raised, begin collecting an annual management fee plus — if all goes well — a performance fee, too. Plus, deal flow is ample, in part due to a retreat by big banks that has created an opportunity for alternative investors who are willing to hold buyout-related and other arguably-riskier financing.

An added bonus? A larger recurring fee haul points to a higher or improved valuation if a firm decides to sell a stake in itself, a move that has — in recent years — provided executives with liquidity without the need to endure the headaches of becoming publicly traded.

There are still some heavyweights that have yet to launch separate credit arms. Among them? Warburg Pincus, Apax Partners, Cinven, Clayton, Dubilier & Rice, Silver Lake, Hellman & Friedman and Leonard Green & Partners. While some may decide to remain solely focused on private equity for the long haul, expect them to become a shrinking minority.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

 

  1. To be sure, Silver Lake has a small arm that invests in the debt of pre-IPO, venture-backed technology companies. The size of its first and only fund to date is $92 million, according to Bloomberg data.

 

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Will Japan’s haven status hold up amid North Korean tensions?

Investors made a run for haven assets, such as the Swiss franc, gold and the Japanese yen, last week as tensions between North Korea and the U.S.came to a head. The pressure seems to have abated for now, but analysts warn they could spike again at any time, raising the question of how safe traditional havens really are.

The yen’s go-to status as asset — a position that currency has maintained in some investor minds since the early 1990s — might be shaky if the diplomatic crisis graduates to a military conflict, market participants said.

As a neighbor to the rivals sharing the Korean Peninsula, with only the Sea of Japan between them, Japan might find itself on the frontline of any military faceoff between Pyongyang and the U.S. It is also home to U.S. military bases, making it a potential strategic target. Besides the physical fallout, a war would have repercussions for the Japanese economy, Kuniyuki Hirai, head of FX trading at MUFG said.

”If armed confrontation materializes in North Korea and Japan would be attacked … there is no sense that the yen would strengthen,” he continued. “The yen may outperform the South Korean won, but the current [trading] situation might be a bit exaggerated or overestimate the yen’s strength.”

Given that, the yen USDJPY, -0.05% might not maintain its traditional status as a haven asset, and could weaken in the event war breaks out in the region, according to Neil Mellor, chief strategist at BNY Mellon.

The relationship between the Japanese currency and risk aversion is based on Japan’s so-called current accounts — a broad gauge of the country’s trade in goods and services, including employee wages and income from investments. Country’s like Japan tend to run current-account surpluses, meaning that their income from overseas trade exceeds payments to foreign entities.

Ultralow interest rates that have prevailed in the region also have made the yen an ideal currency for traders, with investors tending to take advantage of low rates in the region to borrow from and then to sell to identify higher interest-rate currencies elsewhere, in what is typically described as a funding currency.

In June, Japan reported its 36th consecutive current account surplus reading ¥935 billion and expectations of ¥860.5 billion.

For that reason, the Japanese yen has been a currency that has commanded almost reflexive haven bids from traders in time of crisis, even when that turmoil was in Japan.

It is a habit that might be hard to break, some strategist said. Aside from the funding currency, Japanese investors also tend to bring money home in times of trouble.

“At the time of [Japan’s] earthquake [and subsequent tsunami] in 2011, the yen rallied against almost everything else. This kind of repatriation is typical, so there’s a precedent here despite the geographical closeness [to North Korea] and the fact that Japan is home to U.S. military bases,” Hirai said.

Factset
The Japanese yen dropped sharply before strengthening beyond previous levels following the March 11 earthquake in 2011.

But equating a natural disaster and a war is a mistake, Hirai continued. Japanese insurance business have a lot of money invested abroad and repatriate their cash when it is needed for large scale insurance payments, like in the case of the 2011 earthquake, which accelerated the strengthening of the yen.

“[W]ar is a so-called force majeure in insurance disclaimers, and [they] have no liability to pay for the damage,” he said.

Over the past week, the dollar USDJPY, -0.05% weakened 1.4% against the yen, closing at ¥109.19 last Friday. On Monday, the greenback strengthened against all of its rivals as the geopolitical crisis made room for a domestic one following clashes of protestors in Charlottsville, Va. over the weekend. Still, analysts caution that the attention could shift back to North Korea quickly as the annual U.S. and South Korean military drills are on the calendar for later this month.

Another aspect of investors’ leap to safety is that Japan’s government is not too fond of the idea of a stronger yen because it would have a negative impact on Abenomics, the economic policies put in place by Prime Minister Shinzo Abe that are based in part on quantitative easing.

“We should be mindful that [a stronger yen] might lead to at least verbal intervention from the Bank of Japan,” Mellor added.

Another way to play the traditional haven currencies could be to match them against one another, such as in the case of Swiss franc/yen CHFJPY, -0.03%  . Both are considered a good place to put money in turbulent times, but given Switzerland’s enormous geographical distance from North-East Asia, it could easily be considered more resilient compared to the yen.

Meanwhile, the South Korean won KRWJPY, +0.000000% dropped 2% against the yen, closing at ¥0.096 on Friday before picking up some steam to ¥0.0962 this morning.

The South Korean won USDKRW, +0.00% would, of course, suffer in case of a war as the nation would face physical confrontations along its Northern border. Yet, anybody convinced that a war is still unlikely could do well in buying won/yen options to take advantage of any strengthening of the South Korean currency if and when stability returns to the Korean peninsula.

“If there are any negotiations [with North Korea], the won would spike against the yen,” Hirai added.

 

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Oil holds at 3-week low as traders brace for U.S. supply data

Oil pared much of their earlier losses on Tuesday, with U.S. prices finishing just a few cents lower and holding ground at their lowest level in three weeks.

Concerns over growing U.S. shale-oil production weighed on the market, but prices found some support from the latest forecasts calling for a decline in weekly U.S. crude supplies.

September West Texas Intermediate crude oil CLU7, +0.25%  fell 4 cents, or less than 0.1%, to settle at $47.55 a barrel on the New York Mercantile Exchange—off the day’s low of $47.02. Prices again settled at their lowest level since July 24, according to FactSet data. They dropped 2.5% on Monday.

Brent oil for October LCOV7, +0.43%  settled 7 cents, or 0.1%, higher at $50.80 a barrel on ICE Futures Europe—bouncing off an earlier low of $50.02 a barrel. Prices for Brent had settled Monday at their lowest since late July.

Oil likely saw “some value buying moving into the market,” Robbie Fraser, commodity analyst at Schneider Electric, told MarketWatch as prices pared earlier losses.

Oil’s moves are reflective of the “tight trading window we’re in right now,” he said. “The market doesn’t want to take WTI prices over $50 [a barrel] and encourage U.S. production growth, but Brent prices below $50 are viewed as too low, with inventories on the decline and demand showing relative strength.”

“Something has to give at some point, but for now there’s enough interest on either side of this market to keep things fairly range bound,” he added.

The oil market will get its weekly data on U.S. petroleum supplies from the American Petroleum Institute late Tuesday and from the EIA early Wednesday.

Analysts polled by S&P Global Platts expect the EIA report to show that crude supplies fell 3.6 million barrels for the week ended Aug. 11. That would mark a seventh weekly decline in a row for the government data.

The survey also showed expectations for declines of 400,000 barrels for gasoline stockpiles and 700,000 barrels for distillates, which include heating oil.

Back on Nymex, gasoline for September RBU7, +0.42%  rose less than a half cent to $1.580 a gallon, while September heating oil HOU7, -0.02%  fell under a penny, or 0.4%, to $1.600 a gallon.

September natural gas NGU17, -1.18%  declined by 2.4 cents, or 0.8%, to $2.935 per million British thermal units.

Oil prices were already on the decline Monday, then worsened after the U.S. Energy Information Administration said it expects to see a climb in crude output from key U.S. shale regions of 117,000 barrels a day in September to 6.149 million barrels a day.

The report also showed that the number of drilled, but uncompleted wells, or DUC, climbed by 208 in July from June to 7,059.

“This is also bearish because the more DUC wells there are, the more capacity is ready to come online in the face of any sort of price rally,” Tyler Richey, co-editor of the Sevens Report, told MarketWatch Monday afternoon. “So, even if prices rebounded—say on OPEC developments or geopolitics—the subsequent surge in U.S. production would likely spur another decisive imbalance in oil economics as supply would quickly outpace demand.”

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Opinion: Social Security needs more money or benefits will be cut

The 2017 Social Security Trustees Report repeats the drumbeat that the program faces a deficit equal to 2.83% of payroll over the next 75 years and that its trust fund is scheduled for exhaustion in the early 2030s.

The 75-year deficit is the result of a constant tax rate and increasing costs. The increase in costs is driven by the demographics, specifically the drop in the total fertility rate after the baby-boom period. The combined effects of a slow-growing labor force and the retirement of baby boomers reduce the ratio of workers to retirees from 3:1 to 2:1 and raise costs commensurately (see figure below).

The 75-year deficit is the difference between the present discounted value of scheduled benefits and the present discounted value of future taxes plus the assets in the trust fund. This calculation shows that Social Security’s long-run deficit is projected to equal 2.83% of covered payroll earnings. That figure means that if payroll taxes were raised immediately by 2.83 percentage points — 1.42 percentage points each for the employee and the employer — the government would be able to pay the current package of benefits for everyone who reaches retirement age through 2091, with a one-year reserve at the end.

The 75-year cash flow deficit is mitigated somewhat by the existence of a trust fund, with assets currently equal to roughly three years of benefits. These assets are the result of cash flow surpluses that began in response to reforms enacted in 1983. The program, however, is currently using interest on these assets and will soon be drawing on the assets themselves to cover annual benefit payments. The trust fund is projected to be exhausted in 2034.

The exhaustion of the trust fund does not mean that Social Security is “bankrupt.” Payroll tax revenues keep rolling in and can cover about 75% of currently legislated benefits over the remainder of the projection period. Relying on only current tax revenues, however, means that the replacement rate — benefits relative to pre-retirement earnings — will drop to a level not seen since the 1950s.

What to do in your 50s to build wealth for your retirement

The bottom line is that we are going to have to either come up with more money or cut Social Security benefits by 2034. Two recent proposals provide “bookends” for the range of possibilities. Representative Sam Johnson (R-Texas), chairman of the House Ways and Means Social Security Subcommittee, solves the financing problem by cutting benefits, and Representative John Larson (D-Connecticut) ranking member of that subcommittee, by raising taxes.

It is very hard to make any progress without a sense of the desired mix of tax increases and benefit cuts. Do the American people want 100% with benefit cuts, 100% with tax increases, 50%/50%, 75%/25%, or 25%/75%? We need some mechanism to provide Congress with guidance.

 

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Gold aims for first loss in four sessions saber-rattling quiets down

Gold lost ground Monday as easing tensions between the U.S. and North Korea set prices up for their first loss in four sessions.

December gold GCZ7, -0.28%  fell $5.10, or 0.4%, to $1,288.90 an ounce, while September silver SIU7, +0.26%  tacked on 1.5 cents, or 0.1%, to $17.085 an ounce.

“There was no further news of verbal saber-rattling between North Korea and the U.S. over the weekend, with the result that this geopolitical risk appears to be being priced out again somewhat,” said Commerzbank analysts led by Carsten Fritsch in a note Monday.

Last week, gold scored its strongest weekly gain in four months and settled at its highest level in more than two months, as North Korean tensions buoyed haven demand for precious metals.

Despite the pull back in gold prices Monday, however, Julian Phillips, co-founder of Gold Forecaster, warned that the “dramas of last week … could easily change back to heightened fears in a heartbeat.”

“If a missile is fired by North Korea towards Guam then the whole set of global financial markets changes. Gold will certainly rise on war fears then,” he said.

But over the weekend, Secretary of Defense Jim Mattis and Secretary of State Rex Tillerson sought to play down the risk of a conflict, writing in The Wall Street Journal that the Trump administration is seeking diplomatic solutions to achieve the “irreversible denuclearization” of North Korea.

And White House officials found themselves focused on a domestic matter, working to clarify President Donald Trump’s comments on Saturday’s deadly violence at a white supremacist rally in Charlottesville, Va.

“On the other hand, U.S. President Trump has stepped up his rhetoric towards Venezuela,” the Commerzbank analysts added. “These latent risks are likely to lend support to the gold price and preclude any more pronounced price slide.”

President Donald Trump said he would not rule out the use of military force in Venezuela in response to a growing crisis in the South American country led by Nicholas Maduro, according to news reports late Friday.

Looking further ahead, Adrian Ash, head of research at BullionVault, pointed out that “Asian demand is set to resume after the summer,” and gold prices “could find a bigger push if the debt ceiling debate turns into a crisis.”

“Until September though, the big consumer markets are typically quiet,” he told marketWatch.

Other metals on Comex traded on a mixed note Monday. September copperHGU7, -0.27%  fell just under a penny, or 0.3%, to $2.903 a pound and October platinum PLV7, -1.20%  fell $11.20, or 1.1%, to $978.50 an ounce. September palladium PAU7, +0.20%  traded at $899.20 an ounce, up $4.50, or 0.5%.

Among exchange-traded funds, the SPDR Gold Trust GLD, -0.48%  fell 0.6%, while the iShares Silver Trust SLV, +0.29%  shed 0.2%. The VanEck Vectors Gold Miners ETF GDX, -0.90%  headed 1.1% lower.

 

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