UK Tories win; Cameron says EU referendum to go ahead

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The Conservative Party has secured a surprise victory in the UK general election, confounding numerous pre-election polls which had pointed to a neck-and-neck race with the opposition Labour Party.

At around 12:30 p.m. London time, the BBC state broadcasting service reported that the incumbent Conservatives had won at least 326 seats, giving them a ruling majority in parliament.

Labour were known to have won 232 seats and former coalition partner Liberal Democrats had a miniscule eight seats.

“Majority government is more accountable,” newly re-elected Prime Minister David Cameron said in a speech delivered from the doorstep of 10 Downing Street in London, after thanking former coalition partner ex-Liberal Democrat leader Nick Clegg.

Cameron also pledged to go ahead with his promised referendum on the U.K.’s continued membership of the European Union.

“Yes, we will deliver that in-out-referendum on Europe,” Cameron confirmed in his Downing Street speech.

The uncertainty around of quitting the economic and political union could spook markets longer-term.

“From the perspective of London’s European partners… (the) result is the worst possible outcome: Both emboldened by his strong performance and under pressure from his euroskeptic backbenchers, Cameron can be expected to be a tough negotiation partner in the context of the now virtually-inevitable referendum on EU membership,” said Teneo Intelligence analysts in a research note on Friday.

3 parties without leaders

Ed Miliband, the leader of the U.K.’s Labour Party, resigned on Friday, after it became clear his party had lost to the incumbent Conservatives.

“I am truly sorry I did not succeed,” Miliband told a news conference in London.

“We have come back before and this party will come back again,” Miliband added.
Miliband’s resignation means that three major U.K. opposition parties are now without leaders.

The leaders of the Liberal Democrat party — previously the ruling Conservatives’ coalition partner — and the populist UK Independence Party (UKIP) resigned following their poor showing at the polls.

“I always expected this election to be exceptionally difficult for the Liberal Democrats…We have suffered catastrophic losses,” Lib Dem leader Clegg told a news conference before announcing his resignation.

“Fear and grievance have won, liberalism has lost,” he added in a speech that was received enthusiastically on Twitter.

Miliband held his Doncaster North seat, but other big name Labour politicians lost theirs. These included opposition finance minister, Ed Balls, who had been touted as a future leader of the party.

Multiple key Lib Dem figures lost their seats, including incumbent Business Secretary Vince Cable and Lib Dem Chief Secretary to the Treasury, Danny Alexander, in Inverness, Scotland.

‘More business friendly’

Sterling jumped to its highest against the US dollar since the end of February and the UK’s FTSE 100 index was up around 2 percent on news of the Conservative victory.

“Sterling has surged and other markets are likely to follow suit. Giltswill likely benefit from the fact that the Conservatives will likely be able to press ahead with their plans to reduce the deficit more quickly than Labour would have done,” Howard Archer, chief U.K. and European economist at IHS Global Insight, said in a note Friday.

“The fact that the election has seemingly delivered a government that could well survive for a full term – and crucially avoided the need for another general election later this year – is good for stability which should be supportive to economic activity.”

He added that the Conservatives were seen as “more business friendly” than the other parties.

Scotland turns yellow

North of the border, the SNP made headlines, wiping out nearly all opposition to claim 56 out of 59 seats in Scotland.

Notably, Labour’s campaign chief Douglas Alexander lost his seat to a 20-year-old SNP candidate, the youngest U.K. member of parliament in centuries.

The leader of Scottish Labour, Jim Murphy, also lost his seat.

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Crisis will happen again, but not like 2008: Geithner

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Former Treasury Secretary Tim Geithner said Thursday that a financial crisis will happen again at some point, but the structural reforms undertaken after 2008 can serve to mitigate the damage.

The US economy now is a more stable, resilient, and stronger economy than before the 2008 financial crisis, Geithner said in an interview with CNBC’s “Squawk Box.” Even with the challenges in the US economy, America is a “lucky country,” he added.

“People thought [in 2008] that we were going to have a Great Depression. People thought we might have hyperinflation. We thought we might turn into Greece,” he said. Instead, he added, “the American economy is doing relatively well, making steady progress.”

If a financial crisis does happen in the future, however, the Federal Reserve and the government would need to act again, he said. “The only way you protect people from the effects of classic panics is to have the central bank and the government step in and take the risks the market can’t take.”

The market reforms after 2008 put “much more capital into the system” and “much tougher rules on risk-taking,” Geithner said. “They’re strong enough, if they’re not eroded, to buy this country a relatively long period of financial stability.”

Geithner supported a strong dollar when he led the department. But he refused on Thursday to comment on the 18 percent rise in the dollar over the past 12 months against a basket of major currencies.

While the dollar has recently backed off its highs, a stronger US currency makes goods sold by American companies overseas more expensive, which can put them at a pricing disadvantage to their foreign competitors.

The negative impact of that dynamic has shown up in corporate earnings in recent quarters.

Geithner was also asked to react to Fed Chair Janet Yellen’s comments Wednesday that stock market valuations appear “quite high.”

Read More: Yellen: Equity valuations high

“It’s very hard to know what markets reflect at any given point in time. It’s really hard to know, except in retrospect when market prices, valuations are defying gravity,” he said.

“[Yellen] knows that. She’s a very thoughtful, smart person,” he said, but he refused to speculate why Yellen made those remarks.

“I can say she’s doing an excellent job,” he said.

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IMF: Asia will remain the global growth leader

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Yellen says equity valuations generally high

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Federal Reserve Chair Janet Yellen on Wednesday warned that equity market valuations were “quite high,” though she said the Fed was not seeing the hallmarks of a bubble.

She also noted that the Fed was watching the issue closely.

“I would highlight that equity market valuations at this point generally are quite high,” Yellen said, according to Reuters. “There are potential dangers there.”

Read More: Stocks getting ‘fully valued’: Michael Farr

Stocks, which had turned lower after a strong open, fell further following Yellen’s comments.

“She’s really raising those questions that valuations are pretty full. I agree with that,” said David O’Malley, CEO of Penn Mutual Asset Management.

Yellen also made note of the risks to open-ended mutual funds, Reuters reported, particularly dangers to liquidity if redemptions rose.

“It’s more likely that Janet Yellen’s comments spilled over into the downturn. Yellen’s comments are in line with things she said in the past on overstretched valuations,” said Ben Garber, capital markets economist at Moody’s Analytics.

Read More: Ron Insana: Jobs report may tip the Fed’s hand 

Earlier Wednesday, Yellen said the Fed and other banking regulators have made significant progress in correcting flaws in the financial system that triggered the worst banking crisis in seven decades.

Banking regulators are remaining “watchful” for any areas where further reforms may be needed, she said in remarks at a financial conference.

Yellen cited the need to address the problem of “too big to fail” — the perception among investors that some institutions are so large that the government will step in and save them if they get into trouble.

She said the Fed and other regulators are taking steps to make sure that the collapse of even very large banking institutions can be handled in ways that don’t jeopardize the stability of the entire system.

Read More: The list of big money bond market bashers is growing

Yellen’s comments came in a joint appearance with International Monetary Fund Managing Director Christine Lagarde at a conference sponsored by the Institute for New Economic Thinking.

Lagarde told the group that a recent IMF report found that risks to financial stability around the globe are rising with increasing risks at non-bank financial institutions and in emerging market countries.

“We need to build a financial system that is both more ethical and oriented more to the needs of the real economy — a financial system that serves society and not the other way around,” Lagarde said.

Read More: Fed’s Evans: Here’s when rate hike is appropriate

Yellen said a well-functioning financial sector promotes job creation, innovation and economic growth but that problems arise when the incentives become distorted, prompting bank executives to pursue risky strategies to increase profits.

“Unfortunately, in the years preceding the financial crisis, all too many firms took on risks they could neither measure nor manage,” she said.

“The result was the most severe financial crisis and economic downturn since the Great Depression,” the Fed chief said, noting that 9 million American lost their jobs and roughly twice that many lost their homes.

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Oil at $60, get ready for ‘frack counterattack’

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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US oil prices are heading into a sweet spot that could spur the fracking industry to crank up some of the drilling it shut down when crude prices collapsed.

West Texas Intermediate oil futures for June rose above USD 60 per barrel Tuesday for the first time since December. That sparked expectations the price could go even higher, if US oil inventory data Wednesday show an expected draw down in oil stored at the Nymex physical hub in Cushing, Oklahoma.

“If oil prices stabilize above USD 60, I believe we are going to resume production growth in the second half of the year. More companies will drill more wells,” said Fadel Gheit, senior energy analyst at Oppenheimer.

WTI and Brent crude, the international benchmark, rose as protests stopped oil flows to Libya’s eastern port and Saudi Arabia raised the official selling price for Arab Light grade crude to the US and Northwest Europe. Brent was above USD 68 a barrel for the first time since December.

But price gains should be capped by any increase in output so oil prices may not go much higher for now. “Any increases in oil prices will bring more oil production, and it will dampen any price increases. Every time more production comes on, it is self-fulfilling. … It will douse it and cool it off,” said Gheit.

Read More: OPEC likely to maintain policy in June: Delegates

Oil prices collapsed earlier this year after the Organization of the Petroleum Exporting Countries decided last November to let market forces determine the price of oil. Saudi Arabia made clear it would not cut its production while other higher cost producers, like the US shale industry, continued to drill at full throttle.

Since then the Saudis have upped production to 10 million barrels or more a day, and US oil production rose, then plateaued at around 9.3 million-9.4 million barrels a day. No change in OPEC policy is currently expected.

On Tuesday, Saudi Arabia oil minister Ali al-Naimi said he was not concerned by oil prices and that he was “not worried at all” about the prospect of Iranian crude coming back onto the market if sanctions on Iran are lifted as part of an international nuclear deal.

Read More: Only Allah knows about oil prices: Saudi oil chief

The US industry, meanwhile, could be quick to gear up for a “fracking counterattack,” said Andrew Lipow of Lipow Oil Associates. Lipow noted the forward futures show prices out in 2016 and 2017 to USD 65, USD 70 per barrel. “A lof of these frackers are thinking, ‘Maybe I should hedge out in those years and start bringing rigs back on line at the end of 2015,” he said. “I think anything over USD 60 is getting them interested in the Bakken and Eagle Ford.”

The US oil rig count fell to 679 as of last week, down from 1,527 at the same time last year. Besides shut-in wells, the industry could quickly get hundreds of of semicompleted wells up and running.

“This rally has been predicated in large part by the declining rig count impact on production. If we actually see production stabilize at around 9.4 million barrels a day, that’s going to be bad news for the oil market because the producers were able to combat the decline in prices with better production efficiency and use of technology,” Lipow said.

The fracking industry came under criticism from investor David Einhorn, chief of Greenlight Capital, on Monday at the Ira Sohn Conference. He described Pioneer Natural Resources as the ‘mother fracker,’ and “A business that burns cash and doesn’t grow, (that) isn’t worth anything.”

Einhorn said investments in Pioneer Natural and other shale drillers could “contaminate oil portfolio returns.” Pioneer Natural shares fell, and dropped again Tuesday, ahead of its after-hours earnings release.

Gheit said Pioneer, and EOG, another company Einhorn criticized would be the first to resume some drilling. He said companies like those two, with low breakeven points, will immediately bring rigs back on line. The S&P energy sector was the only major sector trading higher on Tuesday.

Read More: Einhorn made valid points on fracking-analyst

Dennis Gartman, publisher of the Gartman Letter, said he disagreed with Einhorn’s assumptions that the forward curve of the futures market is saying prices are expected to recover to about USD 63 per barrel next year and USD 68 in the long term.

“That is not at all what the market is saying; it is instead saying that there is a large supply of crude oil available to the market; that crude is being paid to go into storage and that either supplies are far larger than needed or that demand is weaker than thought,” wrote Gartman.

While some analysts do believe oil could see another low, crude futures have been firming since WTI futures hit a low of USD 42.03 barrels a day in March.

John Kilduff of Again Capital said WTI oil could top out near term at about the USD 63 per barrel. The price has benefited from a geopolitical premium of about USD 8 to USD 10 per barrel, due in part to concerns about Yemen.

“It’s been a strong rally for a month or two now. There’s some technical buying and continued nervousness. The EIA report will show a draw down at Cushing. That’s getting attention.,” Kilduff said, referring to the Energy Information Administration. Cushing storage has been getting closer to capacity due to high US production, and analysts had been concerned cheap oil would flood the market if it reached capacity. A reversal of that trend would be supportive of prices.

Kilduff also said continuing tensions with Iran in the Persian Gulf is a positive for prices. “There’s tension there. That could turn into a shooting situation quickly. Now US Navy ships are escorting British flagged ships” in the Strait of Hormuz. “That’s anxiety inducing.”

Wednesday’s EIA data also could be market moving. Kilduff expects a draw down in Cushing but a build of 2.4 million barrels in US oil supply.

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McDonald’s plan lacks direction, former exec says

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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McDonald’s hotly anticipated turnaround plan went over like a limp fry on Monday.

“Based on this presentation, I’d defy anyone to figure out what they want the brand to be when it grows up,” said Larry Light, former McDonald’s chief marketing officer and current CEO of marketing consultancy firm Arcature, in a phone interview.

“When it came to a discussion on the brand, there were glittering generalities but no specifics,” Light added.

In a phone conversation with CNBC, McDonald’s Spokeswoman Heidi Barker stressed Monday’s announcement was only the initial steps of the turnaround.

McDonald’s shares fell 0.6 percent in early trading, following the release of a turnaround plan that analysts had said was crucial to the company’s hopes of a rebound.

The company said it would accelerate refranchising, overhaul its organization structure and deliver about USD 300 million in net annual general and administrative expense savings, most of which it says it will realize by the end of 2017.

Read More: McDonald’s CEO: ‘We will be accelerating’ refranchising

Restructuring will not turn a brand around if there is not clear brand direction, said Light, who thought the presentation lacked brand direction and specifics about the fast food giant’s customers.

Light was part of the team that helped McDonald’s right the ship during a previous difficult period in the brand’s history in the early 2000s.

“The key to the turnaround is we aligned the system around a coherent plan,” he said.

Still, he was encouraged by the sense of urgency CEO Steve Easterbrook said was necessary to improve the company’s performance.

“The refranchising—it’s about time. The improved financial discipline and reduced G&A—it’s about time. Restructuring—you can’t be against that – but it felt like about 80 percent of the presentation and about half of the press release is about reorganizing,” he said.

Will Slaubaugh, a managing director at Stephens, called McDonald’s stock drop a “knee-jerk reaction.”

“What was probably missing was a return to more capital to shareholders…I think that might be why the stock is trading down initially,” he said.

McDonald’s plans to reach the top end of its three-year USD 18 billion to USD 20 billion cash return target by the end of next year.

Still, Slaubaugh said the plan included “multiple moves in the right direction.”

“Much of these developments appear previously anticipated” and “the Street likely wanted more details on the operational front,” said Janney Capital Markets Analyst Mark Kalinowski in a note to clients about the slight share price drop in McDonald’s stock.

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Bill Gross: Bull market ending with a ‘whimper’

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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A glum Bill Gross sees both himself and the bull market facing the same long road to oblivion.

In his monthly letter to investors, the bond guru at Janus Capital Markets compared the 6-year-old bull to a 71-year-old man like himself, extending the dark analogy to the fate of the terminally ill protagonist of Mitch Albom’s “Tuesdays with Morrie”: The future is a “downward sloping glide path filled with cancer, stroke, and associated surgeries which make life less bearable than it was a day, a month, a decade before.”

The roaring market will run out of steam “with a whimper, not a bang,” Gross predicted. Central bank stimulus isn’t having the same effect anymore, and anemic global growth and weak corporate earnings will put a lid on asset price appreciation.

“A rational investor must indeed have a sense of an ending, not another Lehman crash, but a crush of perpetual bull market enthusiasm,” he wrote.

While at bond giant Pimco, Gross had been a proponent of the “new normal” idea that economic growth and market gains both would be muted in the years ahead. The idea, when espoused around the time of the financial crisis, didn’t particularly pan out. Stocks rode trillions in Federal Reserve money printing to historic highs and the bond market, despite multiple predictions of its demise, has held in there as investors have continued to seek safe haven plays.

Read More: Bill Gross: Why Fed will have problems raising rates

Gross acknowledged his own whiffs in predicting and, moreover, scoffed at his peers for still clinging to the “new normal” notion, which he said depends “on the less than commonsensical notion that a global debt crisis can be cured with more and more debt.”

He also talked his own book, recommending investors buy into the idea of an unconstrained fund the likes of which he has been running at Janus since heading there last fall after a much-publicized breakup with Pimco.

At the same time, the fund pitch served as a rejoinder against criticism leveled recently by some of his competitors—in particular Jeff Gundlach at DoubleLine—that unconstrained funds are too opaque.

Read More: Gundlach vs. Gross? The ‘unconstrained’ debate

“Active asset managers as well, conveniently forget that their (my) industry has failed to reduce fees as a percentage of assets which have multiplied by at least a factor of 20 since 1981,” Gross added in the letter. “They believe therefore, that they and their industry deserve to be 20 times richer because of their skill or better yet, their introduction of confusing and sometimes destructive quantitative technologies and derivatives that led to Lehman and the Great Recession.”

Investors, he said, should start expecting occasional negative annual returns and positive returns that often will run no more than 4 percent or so.

“As it is, in 2015, I merely have a sense of an ending, a secular bull market ending with a whimper, not a bang,” he said. “But if so, like death, only the timing is in doubt. Because of this sense, however, I have unrest, increasingly a great unrest. You should as well.”

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India a year after Modi’s election: The bullish case

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Almost a year after the world’s biggest democracy sent a reform-minded, pro-business candidate to its top political office, the bulls still have a case to make in favor of India — at least in the longer term.

Narendra Modi’s election whipped up an optimism that soon played out in India’s markets. The BSE Sensex, India’s chief stock index, shot up roughly 40 percent after his election last year. But things have cooled a lot in 2015, with the Sensex lower by 1.8 percent year-to-date.

But in the longer term, the bulls are still making a case for India. The nation is likely to become an increasingly important source of labor for global corporations. It has the best demographics among the big emerging-market countries, said Jim O’Neill, the former Goldman Sachs Asset Management chairman who famously coined the term “BRIC” — a catch-all for Brazil, Russia, India and China. A strong domestic market and a credible legal system are factors that make India slightly more balanced than China, he said.

“India has fantastic demographics. With urbanization in its early stages, size of the working population and productivity, India has great growth potential,” said O’Neill, now a visiting research fellow at leading European think tank Bruegel.

Read More: Omaha crash kills Berkshire investor from India

China’s market is the world’s hottest so far this year, but the Asian giant has seen double-digit slumps in its manufacturing jobs, prompting some market-watchers, including Barron’s on Monday, to question how long the China bull can last.

India is expanding its supply of labor, and that’s likely to draw more foreign direct investment into the country. According to Boston Consulting Group, India’s hourly wage in the manufacturing sector is 92 cents, compared to $3.52 in China. O’Neill said by 2030, India’s nearly 500-million-strong labor force could grow by an amount equal to the combined labor force of France, Germany, Italy and the United Kingdom.

“India has a labor opportunity and can see substantial investment throughout the next 30 to 40 years,” said Rafiq Dossani, director of Rand Center for Asia Pacific Policy. “Europe, USA and Japan are very keen to look at India as an alternative for labor.”

Another reason the $2 trillion economy could draw in more foreign investors is Modi’s relatively pro-business stance, particularly a campaign called “Make in India” that aims to boost manufacturing by improving national infrastructure.

Read More: Next for India: Fiscal stimulus?

Deepak Bagla, managing director and CEO of Invest India—a firm that aims to drive investment to India — said that “Make in India” opens 25 sectors of the Indian economy to foreign investment.

“‘Make in India’ covers virtually everything,” Bagla said. “It is difficult to find a situation where a foreign investor cannot invest.”

“Make in India” is supplemented by Modi’s “Minimum government, maximum governance” policy, which is directed at reducing the size of India’s huge bureaucracy, which O’Neill characterized as a major roadblock for the country
The more bearish case

All that said, India faces huge hurdles and is unlikely to overtake China as an investment hub anytime soon.

Complexity in the Indian government system restricts access to many of the economic sectors that are open to investment under “Make in India.” Being a democracy, India requires considerable effort before it can open its framework to allow anywhere near the rate of investment that China can draw, O’Neill said.

“India is a highly decentralized nation with a lot of state power, as well as different political influences,” he said, “and it would take considerable efforts to organize India’s workforce in the way China has found it so easy to do.”

According to a United Nations report, foreign cash inflows to India stood at $35 billion in 2014, while China was the leading draw for foreign money with inflows of $128 billion.
No ‘wow’ factor

India’s highly anticipated national budget, released in February, dampened the interest of foreign investors, according to the Wall Street Journal.

O’Neill said while nothing was hugely amiss with the budget, it lacked a “wow factor” that the Indian and international public had foreseen. Investors had hoped for something in the budget that would signal a friendlier business environment, but didn’t see any huge changes.

India ranked 142 among 189 countries for the ease of doing business, according to the World Bank Group’s “Doing Business” rankings, benchmarked to June 2014. By comparison, China stood more than 50 points ahead at number 90.

Read More: Hopes for a new, more open India aren’t dead yet

“It is definitely difficult to start and run a business in India,” said Anubhav Gupta, senior program adviser at Asia Society Policy Institute. “Obtaining land rights, dealing with construction permits (where India ranks 184 in the World Bank rankings), enforcing contracts and taxation are all big issues.”

Gupta praised the “Make in India” campaign is, but said it’s hobbled by a lack of infrastructure and requires more substantive policy reforms behind it. Power failures are another major issue that India needs to tackle in order to boast a robust manufacturing sector, he said.

“India would love to be the next China in terms of manufacturing, but other than having a similar population, I cannot think of any other realistic reason how this could happen,” O’Neill said. “It needs to progress so much to be in the same league as China.”

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow