Tag Archives: Global Economy

Ride to the Bottom: U.S. energy workers hit hard by company stock bets

OKLAHOMA CITY (Reuters) – Nearly 15 years since Enron’s collapse decimated the retirement accounts of its employees, hundreds of thousands of U.S. energy workers remain precariously exposed to big, concentrated bets on company stock in their 401(k) retirement plans.

The slide in oil prices to their lowest levels in over a decade wiped out several billion dollars of retirement wealth in the energy sector in the past year. The losses may prove temporary for companies that successfully navigate the crisis, but tens of thousands of employees of struggling firms may see much of their nest eggs gone for good.

In Oklahoma and Texas, workers are delaying retirement plans, surrendering trucks, cars and land in personal bankruptcy cases, or just praying oil prices will recover.

“I just didn’t see it coming,” said John Thompson, 57, who was laid off in February from Oklahoma City-based SandRidge Energy Inc. SandRidge shares, which peaked above $65 in 2008, are now worth 10 cents apiece. “Because of this, I’m not retiring any time soon.”

SandRidge did not return messages seeking comment.

Almost without exception energy company 401(k) plans offered at least 10 different investment alternatives to company stock, their plans show.

Yet company reports and interviews with more than 20 current and former employees at independent energy firms show many employees have not taken advantage of opportunities to switch out of company shares.

Maureen Nelson, who retired from Chesapeake Energy Corp in 2013, said she lost an estimated $100,000 as she watched the company’s shares plunge in value.

Inertia and a strong faith in company leadership played a role in holding on to company stock, but so did company policies.

Many energy firms continued to match employee contributions with company stock, even as most large U.S. companies stopped the practice after the Enron debacle, according to several corporate benefits consultants.

The energy industry followed the lead of heavyweights such as Chevron Corp and Exxon Mobil Corp, which for years provided matching contributions in company stock in worker 401(k) retirement plans while also funding separate defined benefit pension plans for them.

DOUBLE IMPACT

Smaller companies could not afford to do both, but they typically matched employee contributions in stock. And energy workers often plowed some or most of their own contributions into company stock, benefits consultants said.

“It’s not prudent investing,” said Lou Harvey, chief executive of Boston-based financial research firm Dalbar Inc. “But employees tend to clamor for company stock.”

Typically, workers at larger energy companies would have 20 percent to 60 percent of 401(k) assets in company stock, according to a Reuters analysis of such holdings for more than 400,000 employees.

By contrast, the average U.S. 401(k) plan has about 7 percent of assets in company stock, according to Washington D.C.-based Investment Company Institute.

At Chevron, more than 40,000 participants in its 401(k) plan held $8.9 billion, or 47 percent of investment assets, in company stock at the end of 2014, according to the latest annual report.

Chevron stopped matching in company stock last year for better diversification, spokeswoman Melissa Ritchie said. Exxon stopped new stock contributions after 2006. Its shares still accounted for $12.9 billion of the 401(k) plan’s $22.3 billion in assets in 2014. Exxon declined comment.

When Texas-based Enron filed for bankruptcy in 2001, employees suffered a one-two punch – they lost their jobs and much of their savings because nearly two-thirds of their retirement assets were in Enron stock.

After Enron’s collapse, companies successfully lobbied Congress mostly against proposals to limit company stock ownership in 401(k) plans, fearing billions of dollars of their shares would be offloaded to meet the caps.

“Caps were a bridge too far for companies,” said Sheila Bair, former chair of the Federal Deposit Insurance Corporation and a U.S. Treasury official who worked on President George W. Bush’s 2002 task force on retirement security.

Still, publicly-traded companies have revamped their retirement plans to make them more balanced, even imposing own limits on company stock ownership, said Rob Austin, director of retirement research at Aon Hewitt.

FOLLOW THE LEADER

Diversification has yet to reach much of the energy sector, though. Oil and gas workers had more than $32 billion in company stock in their 401(k) accounts, or about 38 percent of plan assets for the 40 companies in the S&P 500 Energy Sector Index, according to 2014 annual reports filed with the U.S. Department of Labor. Since then, the index has lost 21 percent. Smaller independents have been hit about twice as hard, on average.

With about a third of his 401(k) plan in company stock, retired Chesapeake geologist Keith Rasmussen, 61, looks to sell land he owns in Oklahoma and Idaho to shore up his depleted retirement funds.

Chesapeake, once a shale boom darling, now trades 84 percent below mid-2014 levels, hurt by heavy debt and prolonged slump in natural gas prices. Nearly 8,000 participants in its 401(k) are exposed to the reversal of fortune, holding 35 percent of the plan’s $615 million in assets in company stock at the end of 2014, according to the latest annual report.

Some current and former Chesapeake employees said their decisions to hold onto stock were based partly on their reverence for Aubrey McClendon, its legendary former chief executive, who died in a car crash in early March

“You could be the biggest skeptic in the world, and you listen to him in a room for 30 minutes, and you’re ready to hand him all your money,” said Ginni Kennedy, 58, who retired from her engineering job at Chesapeake in 2013. “I had faith that he’d continue to be able to pull those rabbits out of his hat.”

Chesapeake, which declined to comment, stopped matching in company stock last year.

Many workers are now paying a heavy price for failing to heed warnings about concentration risk.

“Our bankruptcy work has quadrupled over the past six months,” said Roger Ediger, an Enid, Oklahoma lawyer who handles personal bankruptcy cases. “Most of them are energy related.”

A U.S. Supreme Court decision in 2014 underscored the risk of offering company shares in 401(k) plans. Its decision made clear that company stock was not automatically a prudent investment.

The ruling also highlighted the potential conflicts of interest for companies in their role as fiduciary of 401(k) plans.

“It was a wake-up call to companies,” said Bill Ryan, chief fiduciary officer at Evercore Trust, the largest U.S. third-party fiduciary.

At Fort Worth, Texas-based Quicksilver Resources Inc, Evercore Trust took a rare step to block further employee investment in the company’s 401(k) plan in October 2014, as fiduciary for the stock plan. The move preserved some value, but not much, given that by the time the stock fund was liquidated company shares have already fallen to about 50 cents from about $3.50 in 2014. Equity investors lost virtually everything five months later when Quicksilver filed for bankruptcy protection.

Bair, now a college president, said companies with heavy stock concentrations in their 401(k)s should follow peers that have caps in place to protect workers and avoid government mandates.

“If we have another failure like Enron, government regulation may be coming.”

(Reporting By Tim McLaughlin and Luc Cohen; Editing by Tomasz Janowski)

Japan manufacturing activity contracts in March, a worrying sign for economy

TOKYO (Reuters) – Japan’s manufacturing activity contracted in March for the first time in almost a year as new export orders shrank sharply, a preliminary business survey showed on Tuesday, in a worrying sign that the global economy is weakening.

The Markit/Nikkei Flash Japan Manufacturing Purchasing Managers Index (PMI) fell to 49.1 in March on a seasonally adjusted basis from a final 50.1 in February.

It fell below the 50 threshold that separates contraction from expansion for the first time since April last year.

The sub-index for new export orders fell to a preliminary 45.9 from 49.0 in February, which would indicate the sharpest contraction since January 2013 if confirmed by the final report.

Japan’s exports fell for a fifth straight month in February, separate data from the finance ministry showed last week.

Some economists say Japan’s exports could remain weak for some time as a slowdown in China and other emerging markets weighs on demand for Japanese machinery and electronics.

Japan’s economy, the world’s third-largest, shrank in the final quarter of 2015 as slow wage growth and sluggish global demand hurt consumption and exports.

While many analysts expect growth to have rebounded modestly in the current quarter, concern about global demand has led some to predict another contraction that will push Japan back into recession – defined as two straight quarters of economic contraction.

The Bank of Japan stunned global markets in January by adding negative interest rates to its massive asset-buying program as it struggles to reflate the long-moribund economy.

(Reporting by Stanley White; Editing by Kim Coghill)

Italy’s bank troubles test European Central Bank’s mettle

MILAN (Reuters) – The European Central Bank is trying to strongarm Italian banks into cleaning up their balance sheets, a year and a half after they fared the worst of all euro zone lenders in its first stress tests as overarching supervisor.

The banks have made scant progress on requested reforms, threatening to undermine a fragile recovery in the bloc’s third largest economy. They argue the ECB’s demands are unrealistic and delay the very consolidation the sector needs.

The standoff poses one of the biggest challenges to Europe’s central bank since it became the euro zone single banking regulator in November 2014. After Greek banks, Italian ones are now taking up most of its time.

Banks like Carige and Monte dei Paschi di Siena have their liquidity monitored daily and the ECB, working in teams with Italy’s central bank, is firing off missives telling lenders to raise capital, find a buyer and sell off bad loans.

“They phone, they e-mail and they come down to see us,” said a source at one Italian bank, who declined to be named due to the sensitivity of the issue.

“They are a constant presence. For one reason or the other there is always an inspection – I’d say they are here two months out of three.”

Letters to Veneto Banca and Banca Popolare di Vicenza, which must raise a combined 2.75 billion euros in cash and list on the market to meet ECB demands, threaten all the measures allowed by the EU banking resolution directive — including the last resort of the ECB removing top executives and taking over management.

A crucial test of the strategy is a much-anticipated merger between Banca Popolare di Milano and Banco Popolare that would be Italy’s first tie-up since the ECB took on supervision.

RENZI WEIGHS IN

The boards of BPM and Banco Popolare are meeting this week and sources close to the matter say Banco Popolare is considering a cash call of up to 1 billion euros as part of measures sought by the ECB to clear the merger.

Any deal would still need the blessing of both banks’ shareholders, including powerful unions who fear a tie-up will lead to job cuts.

Bankers close to the talks say the ECB’s conditions for approving the combination have been so stringent that after months of negotiations, the two banks considered abandoning the deal, which would create Italy’s third biggest bank.

“If this merger falls through, the ECB will have to take responsibility for this,” said a frustrated adviser for one of the banks. “It’s like the doctor killing the patient.”

Danielle Nouy, the ECB’s bank supervisory chief, said on Tuesday the merged bank had to be strong from the start.

“We are working very hard with our Italian colleagues to make sure that we put the adequate requirements, no more than is needed but no less, either,” she told the European parliament.

The ECB is demanding a leaner structure and a business plan for the new group within a month: the original deal outline included a 19-member board, two headquarters, no cash call and Popolare di Milano keeping its autonomy and a separate board for six years.

Prime Minister Matteo Renzi — who last year rammed through a decree intended to encourage banking mergers — weighed in on Friday to put pressure on the lenders to reach an agreement.

A sell-off in Italian banking stocks – some have lost more than half their value so far this year – and a flight of deposits from banks seen as more vulnerable, means the government feels time is running out.

“2016 is the year when Italy must sort out its banking problems once and for all,” Renzi said.

ECB’S CREDIBILITY DRIVE

Analysts say the ECB, which is headed by former Bank of Italy chief Mario Draghi, wants to establish itself as a credible institution, ensuring Europe’s banking industry is on a sound footing and taking laggards to task.

“The regulator is being extra cautious and particularly severe and active when it comes to Italy but the situation warrants it,” said Andrea Resti, an adviser to the European Parliament on banking supervision.

After a three-year recession, Italy’s banks are saddled with 360 billion euros ($405 billion) of bad loans – one third of the European total and equivalent to one fifth of Italy’s output.

Banks are reluctant to sell soured debts quickly, fearing that would blow a hole in their accounts and force them to raise cash in rough markets.

One reason for the sector’s fragility is the fragmented financial industry with 650 banks, most of which are tiny lenders with patronage ties to local communities. “It’s not that banks in other countries don’t have problems, but in Italy it’s more widespread, because you have lots of small banks that do not have the shock absorption capacity you find in bigger banks,” said Nicolas Veron, a financial services expert at think-tank Bruegel in Brussels. “A third of the banks that failed the ECB tests were Italian, but since then not much has happened.”

BAD MEMORIES

The unresolved problems of Italy’s banking sector also serve as a reminder of the scars left by the euro zone debt crisis.

The banks’ large holdings of government bonds plummeted in value as the cost of servicing Italy’s debt, the world’s fourth largest, soared at the height of the crisis.

Rome said then it did not need a Spanish-style, EU-funded bailout for its banks, but only the ECB’s pledge to save the euro and its cheap long-term loans halted the vicious circle of sovereign risks sinking the country’s lenders.

Now the government’s hands are tied, because under tougher European rules that came into force this year any rescue of weaker banks would wipe out shareholders and impose losses on creditors and perhaps even large depositors.

Italians got a bitter foretaste of the new regime when the government salvaged four tiny banks in November and 12,000 retail bond holders lost their savings.

Bankers under the microscope say ECB supervisors have uneasy relations with the Bank of Italy, which also declined to comment for this article.

“There is an atmosphere of mistrust and they think Italian banks have been let off the hook for too long by the national regulator,” said a senior investment banker involved in the merger negotiations between the two cooperative banks.

“The ECB is really giving us a hard time.”

(additional reporting by Paola Arosio in Milan, Stefano Bernabei in Rome and Francesco Canepa in Frankfurt; editing by Philippa Fletcher)

Brazil seeks to limit spending, aid states as recession bites

SAO PAULO/BRASILIA (Reuters) – The administration of Brazilian President Dilma Rousseff, facing the threat of impeachment, presented plans on Monday to limit government spending and stave off a debt crisis among states and cities hit by the worst recession in decades.

Under the first proposal, which Finance Minister Nelson Barbosa announced at a news conference in Brasilia, the federal government would limit increases in recurring expenses and slow constitutionally mandated spending during times of hardship. The plan has to be sent to Congress for approval.

Barbosa also announced a program to help debt-laden states and municipalities that could cost taxpayers about $12.6 billion for the next three years. The plan includes refinancing with state development bank BNDES and extending debt maturities for regional governments by 20 years.

A third plan would create a new mechanism for the central bank to mop up or inject more money into the economy without the use of repurchase agreements. Under the plan, Barbosa said, commercial banks would be allowed to make interest-bearing deposits at the central bank, in practice eliminating the need to use government bonds to administer liquidity.

“We are in urgent need of some flexibility to pull the economy out of this recession, create jobs,” Barbosa said. The government’s ability to pull Brazil from recession has been severely hampered by years of erratic policy decisions and a corruption probe into Rousseff’s administration.

Some economists cast doubts on the feasibility of the plans, especially as Rousseff risks being ousted for allegedly using the budget to bolster her re-election chances in 2014. Congress is focused on impeachment proceedings, which the lower house opened last week, and may refrain from voting on any piece of economic legislation until Rousseff’s fate is decided.

For years, Rousseff, who was the country’s top cabinet minister from 2005 to 2010, opposed the budget spending growth limits, which she saw as an attempt by the opposition to curtail plans by her ruling Workers’ Party for massive social and infrastructure plans. As former President Luiz Inácio Lula da Silva’s chief of staff, she vetoed an attempt to implement the limit over 10 years ago.

“The spending limit bill must have been drafted and voted years ago, not now … It’s too late,” said Alexandre Schwartsman, a former central bank board member who now runs his own economic consultancy firm in São Paulo. “It’s hard to tell whether any of these proposals will be voted (on) at this point.”

The country’s budget deficit has mushroomed since Rousseff took office as president in 2011. The overall deficit rose to 10.3 percent of GDP in 2015, nearly five times the shortfall in her first months in office.

(Editing by Chris Reese and Cynthia Osterman)

Global stocks dip, dollar strengthens on Federal Reserve talk

NEW YORK (Reuters) – Global equity markets edged lower on Monday as the dollar strengthened and U.S. Treasury yields rose on hawkish commentary from several Federal Reserve officials.

Richmond Fed President Jeffrey Lacker said U.S. inflation is likely to accelerate in the coming years and move toward the Federal Reserve’s 2 percent target, while San Francisco Fed President John Williams told Market News International he would advocate for another interest rate hike as early as the April meeting.

In addition, Atlanta Fed President Dennis Lockhart said the Fed may be in line for a rate hike as soon as April, as last week’s decision to hold rates steady was more about ensuring that recent global financial volatility had settled down.

“He (Lockhart) reiterated that every meeting is a ‘live’ meeting going forward and I think that overall somewhat hawkish tone to his comments is largely what’s helping support the dollar this afternoon,” said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange Inc in Washington.

The dollar rose 0.29 percent to 95.357 against a basket of major currencies. The greenback had fallen in the three prior weeks for a decline of 3.1 percent.

The currency fell last week when Fed policymakers revised down the number of times they expect to raise interest rates this year to two from four.

Benchmark 10-year notes were last down 13/32 in price to yield 1.9173 percent, from 1.87 percent on Friday.

The stronger dollar weighed on European equities, with the pan-European FTSEurofirst stock index closing down 0.25 percent to start a week shortened by the Easter break.

U.S. stocks were little changed as investors looked for fresh catalysts after a five-week rally that pushed the benchmark S&P 500 into positive territory for the year.

The Dow Jones industrial average rose 21.77 points, or 0.12 percent, to 17,624.07, the S&P 500 gained 2.02 points, or 0.1 percent, to 2,051.6 and the Nasdaq Composite added 13.23 points, or 0.28 percent, to 4,808.87.

MSCI’s index of world shares shed 0.14 percent.

Crude oil prices rose, as Brent settled up 0.8 percent at $41.54 and WTI settled up 1.19 percent at $39.91 a barrel, as data showed a drawdown at the Cushing, Oklahoma delivery hub for U.S. crude. Gains were curbed, however, by concerns U.S. oil drillers could ramp up output after a two-month rally in crude.

Gold fell 0.91 percent to $1,243.60 an ounce as the dollar advanced, its third straight decline, but the metal was underpinned by expectations the ultra-low interest rate environment would persist on a global level.

Copper climbed 0.12 percent to $5,048 a tonne on expectations of stronger demand in top consumer China after a jump in imports of refined copper by the world’s second-largest economy.

Sterling fell 0.73 percent to $1.4373 as worries mounted over Prime Minister David Cameron’s ability to keep his Conservative party together and keep Britain in the European Union after Iain Duncan Smith, a leading voice for the UK to exit the EU, resigned from the cabinet late on Friday.

The euro slipped 0.24 percent to trade at $1.124.

(Additional reporting by Dion Rabouin; Editing by Dan Grebler and Bernadette Baum)

China central bank to Federal Reserve: A little help, please?

WASHINGTON (Reuters) – Confronted with a plunge in its stock markets last year, China’s central bank swiftly reached out to the U.S. Federal Reserve, asking it to share its play book for dealing with Wall Street’s “Black Monday” crash of 1987.

The request came in a July 27 email from a People’s Bank of China official with a subject line: “Your urgent assistance is greatly appreciated!”

In a message to a senior Fed staffer, the PBOC’s New York-based chief representative for the Americas, Song Xiangyan, pointed to the day’s 8.5 percent drop in Chinese stocks and said “my Governor would like to draw from your good experience.”

It is not known whether the PBOC had contacted the Fed to deal with previous incidents of market turmoil. The Chinese central bank and the Fed had no comment when reached by Reuters.

In a Reuters analysis last year, Fed insiders, former Fed employees and economists said that there was no official hotline between the PBOC and the Fed and that the Chinese were often reluctant to engage at international meetings.

The Chinese market crash triggered steep declines across global financial markets and within a few hours the Fed sent China’s central bank a trove of publicly-available documents detailing the U.S. central bank’s actions in 1987.

Fed policymakers started a two-day policy meeting the next day and took note of China’s stock sell-off, according the meeting’s minutes. Several said a Chinese economic slowdown could weigh on America.

Financial market contagion from China was one of the reasons cited by the Fed in September when it put off a rate hike that many analysts had expected, a sign of how important China has become both as an industrial powerhouse and as a financial market.

NO SECRETS

The messages, which Reuters obtained through an Freedom of Information Act request, show how alarmed Beijing has become over the deepening financial turmoil and offer a rare insight into one of the least understood major central banks.

The exchanges also show that while the two central banks have a collegial relationship, they might not share secrets even during a crisis.

“Could you please inform us ASAP about the major measures you took at the time,” Song asked the director of the Fed’s International Finance Division, Steven Kamin in the July 27 email.

The message registered in Kamin’s account just after 11 a.m. in Washington. Kamin quickly replied from his Blackberry: “We’ll try to get you something soon.”

What followed five hours later was a 259-word summary of how the Fed worked to calm markets and prevent a recession after the S&P 500 stock index tumbled 20 percent on Oct. 19, 1987.

Kamin also sent notes to guide PBOC officials through the many dozens of pages of Fed transcripts, statements and reports that were attached to the email.

All of the attached documents had long been available on the Fed’s website and it is unclear if they played a role in shaping Beijing’s actions.

Kamin’s documents detail how the Fed began issuing statements the day after the market crash, known as Black Monday, pledging to supply markets with plenty of cash so they could function.

By the time Song wrote to Kamin, China had spent a month fighting a stock market slide and many of the actions taken by the PBOC and other Chinese authorities shared the contours of the Fed’s 1987 game plan.

DESPERATE MEASURES

The July 27 plunge in the Shanghai Composite Index was the biggest one-day fall since 2007 and by then the market had lost nearly a third of its value over six weeks.

China’s central bank had already cut interest rates on June 27 in similar fashion to the Fed’s swift move to ease short-term rates in 1987.

Song told Kamin the PBOC was particularly interested in the details of the Fed’s use of repurchase agreements to temporarily inject cash into the U.S. banking system in 1987.

The PBOC had increased cash injections in June and ramped up repurchase agreements in August as stocks continued to slide. The PBOC also eased policy on Aug. 11 by allowing a 2 percent devaluation in the yuan currency.

As Song and Kamin exchanged messages on July 27 and 28, other Chinese authorities were busy trying to contain the crash.

China’s securities regulator said on July 27 it was prepared to buy shares to stabilize the stock market and that authorities would deal severely with anyone making “malicious” bets that stocks would fall.

In 1987, the Fed contacted banks directly and encouraged them to meet “legitimate funding needs” of their customers, according to Kamin’s email to Song.

In addition to its pledges and cajoling, the U.S. central bank in 1987 eased collateral restrictions on Wall Street and tried to calm markets by intervening in trading earlier than normal. The U.S. economy continued to grow, eventually entering recession in 1990.

The central bank in Beijing does not have as free a hand to conduct policy as does the Fed, which answers to the U.S. Congress but operates independently from the administration.

The PBOC governor Zhou Xiaochuan implements policies ultimately decided by political leaders in Beijing and lacks the authority to lead debate or shed light on decision-making.

China’s vice finance minister told Reuters last year Chinese supervisors needed to learn from countries like the United States.

Premier Li Keqiang said last month China’s regulators did not respond sufficiently but China had fended off systemic risks.

U.S. central bankers say their relative transparency helps their effectiveness and legitimacy, but open records laws also make Fed officials cautious about their communications, much of which must be made public when requested. Fed Vice Chairman Stanley Fischer has said transparency makes it harder for policymakers to have informal discussions.

Kamin pointed out in his email that everything he was sending was publicly available.

“I hope this is helpful,” he said.

(Reporting by Jason Lange in Washington; Additional reporting by Kevin Yao in Beijing; Editing by Tomasz Janowski)

Global stocks post longest streak of gains in two years; dollar firms

NEW YORK (Reuters) – The S&P 500 closed in positive territory for the year for the first time in 2016, leading a gauge of stocks across major markets to a fifth week of gains, its longest weekly run in more than two years.

The dollar, meanwhile, edged up on Friday but ended the week lower against a basket of major currencies, giving a weekly boost to energy and other commodity prices. The U.S. currency fell for a third consecutive week, most recently weighed by the Federal Reserves’ resetting of market expectations on the number of times it will raise rates in 2016.

Oil prices slipped after hitting 2016 peaks.

On Wall Street, the S&P 500 closed above the level where it ended last year for the first time. Healthcare and financial sector stocks were among the leaders, a welcome signal of rotation for stock bulls.

With the fear of a U.S. recession mostly in the rear-view mirror, investors want to add to stock exposure and are buying up the year’s worst performers, according to Art Hogan, chief market strategist at Wunderlich Securities in New York.

“You want to see sector rotation into the laggards,” he said, noting that the rise to positive territory for the S&P 500 could mean the five-week stocks rally could lose steam.

“What we’ve seen is enough good news to say we’re not going into recession. This is a short-term top in a longer-term bull market.”

The Dow Jones industrial average rose 120.81 points, or 0.69 percent, to 17,602.3, the S&P 500 gained 8.97 points, or 0.44 percent, to 2,049.56 and the Nasdaq Composite added 20.66 points, or 0.43 percent, to 4,795.65.

The CBOE Volatility Index a measure of the price traders pay for protection against a slide on the S&P 500, closed at its lowest level since mid-August.

MSCI’s index of stocks in major developed markets gained 1.4 percent this week to end a fifth straight positive week, a streak not seen since February 2014. Stocks in emerging markets jumped 3.2 percent in their third straight weekly advance.

DOLLAR TICKS UP ON SHORT-COVERING

The dollar index bounced back from a five-month low, rising against most major currencies, as traders covered short bets triggered by the Fed’s statement on Wednesday.

The yen gave back 0.2 percent versus the dollar after hitting its strongest since October 2014 on Thursday. The euro slipped 0.4 percent to $1.127.

On Friday, the European Central Bank’s chief economist, Peter Praet, indicated the ECB could further loosen monetary policy.

“It’s been a dizzying selloff for the dollar, so it’s natural that you’re going to get some kind of bounce,” said FX Analytics partner David Gilmore in Essex, Connecticut.

A rising dollar in 2015 weighed on the global economy, and its recent decline has helped push up oil and other commodity prices.

U.S. crude prices slipped after trading above $41 a barrel for the first time since early December as the weekly U.S oil rig count rose for the first time since December. U.S. crude <CLc1> settled up for a fifth straight week.

Brent crude’s front-month contract fell 0.2 percent to $41.47 a barrel after touching a 2016 high of $42.54.

The benchmark U.S. Treasury note rose 7/32 in price to yield 1.8784 percent.

Spot gold closed the week up 0.5 percent after earlier gaining as much as 1.8 percent from last Friday.

Copper posted its highest weekly closing level since October.

(Reporting by Rodrigo Campos, additional reporting by Dion Rabouin, Gertrude Chavez-Dreyfuss, Barani Krishnan and Laila Kearney; Editing by Dan Grebler)

Dow Jones closes positive for year as commodities rally, dollar dives

NEW YORK (Reuters) – Wall Street moved higher on Thursday, pushing the Dow Jones industrial average into positive territory for the year, as commodity prices rose on the back of a weaker U.S. dollar to boost shares in the energy and materials sectors.

The Dow’s move into positive territory came a day after the U.S. Federal Reserve took a dovish stance that weighed on the dollar.

“It was a weak dollar rally,” said John Augustine, chief investment officer at Huntington National Bank. “It took up groups associated with a weaker dollar.”

The top performing sectors in the S&P 500 were materials, industrials and energy.

The rally was a “continued reaction from the Fed’s move,” said David Lefkowitz, senior equities analyst at UBS Americas Wealth Management in New York.

The Fed on Wednesday pointed to moderate U.S. economic growth and strong job gains but cautioned about risks from an uncertain global economy.

The central bank pointed to the possibility of two more rate hikes before the end of the year, having laid out four hikes in 2016 when it raised rates in December.

The Dow and S&P were at their highest since Dec. 31 and the Nasdaq hit its highest since Jan. 7.

For the blue-chip Dow, which includes stocks like GE and Goldman Sachs, the past five weeks’ rally has now clawed back the deep losses that kicked off the year.

Investors’ fears that the U.S. economy could be headed for another recession have faded into the background at least temporarily.

“It’s a pretty equity-friendly backdrop,” Lefkowitz said.

The Dow Jones industrial average closed up 155.73 points, or 0.9 percent, at 17,481.49. The S&P 500 gained 13.37 points, or 0.66 percent, to 2,040.59 and the Nasdaq Composite added 11.02 points, or 0.23 percent, to 4,774.99.

U.S. crude settled up 4.5 percent at $40.20 a barrel on optimism that major producers will strike an output freeze deal next month amid rising crude exports and gasoline demand in the United States..

Healthcare was the only decliner among the 10 major S&P 500 sectors. It fell 1.05 percent, dragged down by Eli Lilly’s 4.7-percent fall.

Industrials gained 2 percent, propped up by General Electric’s 2.6-percent rise to $30.96. The stock gave the biggest boost to the S&P 500.

FedEx rose 11.8 percent at $161.34 after the package delivery company forecast better-than-expected full-year earnings.

Endo International dropped 12.5 percent at $29.68, after the drugmaker forecast first-quarter results below estimates.

About 8.2 billion shares changed hands on U.S. exchanges, above the 8.02 billion average over the last 20 sessions.

Advancing issues outnumbered declining ones on the NYSE by 2,473 to 595, for a 4.16-to-1 ratio on the upside; on the Nasdaq, 1,927 issues rose and 872 fell for a 2.21-to-1 ratio favoring advancers.

The S&P 500 posted 61 new 52-week highs and 6 new lows; the Nasdaq recorded 73 new highs and 74 new lows.

(Additional reporting by Abhiram Nandakumar; Editing by Nick Zieminski)

S&P 500 closes at 2016 high as Federal Reserve signals fewer rate hikes

NEW YORK (Reuters) – The S&P 500 closed at its highest level of the year on Wednesday after the U.S. Federal Reserve left interest rates untouched and signaled fewer rate hikes in coming months.

The Fed indicated moderate U.S. economic growth and “strong job gains” would allow it to tighten policy this year with fresh projections showing policymakers expected two quarter-point hikes by the year’s end, half the number seen in December.

But the U.S. central bank noted the United States continues to face risks from an uncertain global economy.

Because of that uncertainty, “the committee judged it prudent to maintain the current policy stance at this meeting,” Fed Chair Janet Yellen said.

The decision to keep rates steady was in line with analyst predictions, but the Fed’s tone was surprising to some.

“Most folks were looking for a slightly hawkish statement and they did not deliver in that,” said Tom Porcelli, RBC Capital Markets chief U.S. economist. “It was balanced at best and probably even slightly dovish.”

The Dow Jones industrial average closed up 74.23 points, or 0.43 percent, to 17,325.76, the S&P 500 had gained 11.29 points, or 0.56 percent, to 2,027.22 and the Nasdaq Composite had added 35.30 points, or 0.75 percent, to 4,763.97.

The CBOE volatility index a gauge of what equity investors are willing to pay for protection against a drop on the S&P 500, closed at its lowest since early December.

Eight of the 10 major S&P sectors closed higher. Materials were up the most at 1.74 percent. Healthcare and financial stocks lagged.

The S&P energy sector rose 1.6 percent as U.S. oil prices jumped almost 6 percent after major producers firmed up plans to discuss an output freeze and U.S. crude stockpiles grew less than expected.

In corporate news, shares of Peabody Energy Corp, the largest U.S. coal producer, fell 45.4 percent to $2.19. after the company said in a regulatory filing it may have to seek bankruptcy protection.

FedEx shares jumped 5.3 percent after markets closed on a strong full-year earnings forecast in its fiscal third-quarter financial results.

LinkedIn fell 4.9 percent at $109.81 and Gap fell 1.4 percent to $29.28 after Morgan Stanley downgraded both stocks.

Mallinckrodt dropped 6.4 percent to $55.69, continuing its slide for a second day, while fellow specialty drugmaker Endo International recouped some of its losses from Tuesday, jumping 4.1 percent to $33.91.

About 7.6 billion shares changed hands on U.S. exchanges, below the 8.1 billion average over the last 20 sessions.

Advancing issues outnumbered declining ones on the NYSE by 2,462 to 590, for a 4.17-to-1 ratio on the upside; on the Nasdaq, 1,675 issues rose and 1,084 fell for a 1.55-to-1 ratio favoring advancers.

The S&P 500 posted 36 new 52-week highs and 5 new lows; the Nasdaq recorded 38 new highs and 62 new lows.

(Additional reporting by Lewis Krauskopf in New York and Karen Brettell; Editing by Nick Zieminski and Meredith Mazzilli)

More cautious Fed holds rates steady, now sees only two rate hikes this year

WASHINGTON (Reuters) – The Federal Reserve has reached a virtual consensus to raise interest rates twice during the remainder of the year as the U.S. economy continues to muster strong job growth despite global weakness.

Fresh policy and economic projections from Fed officials on Wednesday showed a clear majority expect two quarter-point hikes by the end of 2016, absent a major shock to the economy or job market, while 12 of seventeen expect either two or three hikes.

In keeping its key overnight interest rate unchanged in the current range of 0.25 percent to 0.50 percent, the Fed balanced what it described as “strong job gains” against the fact that “global economic and financial developments continue to pose risks.”

But the clustering of opinion among Fed policymakers, which represented a sharp narrowing of rate projections since the last round of forecasts in December, shows a balance emerging between the need to recognize that continued U.S. economic strength warrants higher rates with a desire to stick with a go-slow approach given the uncertainties of the global economy.

It is a situation not without inconsistency: the Fed’s official policy statement said inflation had ticked up, policymakers’ individual inflation forecasts ticked down, and Fed Chair Janet Yellen told reporters she was not sure what the data indicated.

Headline inflation has been rising, but “I am wary and have not yet concluded that we have seen a significant uptick that will be lasting,” Yellen said at a press conference following the Fed’s two-day policy meeting.

Yellen also said the U.S. economy had proved “very resilient in the face of shocks,” but noted that global risks were still too apparent to hike rates at this time. She said that “caution” would provide more certainty the U.S. economic recovery would be sustained.

The half-empty half-full approach avoids any clear resolution of a disagreement at the highest levels of the central bank over how to interpret recent data. Yellen indicated as much, noting that the policy-setting committee had for the second meeting in a row been unable to agree on summary language about the overall risks faced by the U.S. economy.

A risk assessment has been a staple of Fed statements, used as a way to signal the direction of policy.

“We decline to make a collective assessment,” Yellen said. “Some participants see them as balanced. Some see them as weighted to the downside.”

She stressed the uncertainty facing the committee, with its members poised to hike rates even as they cut the U.S. growth forecast and slowed the expected pace of monetary tightening.

Overall, “you have seen a shift in most participants’ path of policy. That largely reflects a somewhat slower projected path for global growth,” Yellen said. Interest rates will move higher if the Fed’s baseline forecast proves accurate, she added, “but proceeding cautiously will allow us to verify” that the economic recovery remains on track.

CAUTIOUS APPROACH

In its policy statement, the Fed noted the risks still emanating from overseas, which Yellen said included renewed signs of weakness in Japan and Europe, and the ongoing slowdown in China.

“Our first take on this is that it probably leans slightly more dovish, relative to expectations,” said Tom Porcelli, chief U.S. economist at RBC Capital Markets in New York.

The dollar fell sharply against a basket of currencies after the statement. Yields on U.S. Treasuries dropped across the board, while stock markets rallied. The S&P 500 closed at its highest level since Dec. 31.

In fresh individual forecasts, policymakers projected weaker economic growth and lower inflation this year and lowered their estimate of where the targeted lending rate would be in the long run to 3.30 percent from 3.50 percent – a signal that the economic recovery would remain tepid.

The interest rate outlook was a shift from the four quarter-point hikes expected when the Fed raised rates in December for the first time in nearly a decade. But global market volatility early this year clouded that plan.

The Fed had adopted a cautious approach at its last policy meeting in January, amid a selloff on financial markets, weaker oil prices and falling inflation expectations.

Policymakers also signaled on Wednesday they expected continued improvement in the job market, with the unemployment rate expected to decline to 4.7 percent by the end of the year and fall further in 2017 and 2018.

And they marked down their forecast for inflation this year to 1.2 percent from 1.6 percent, though it’s seen recovering to close to the central bank’s 2 percent medium-term target next year.

Kansas City Fed President Esther George dissented in favor of raising rates at this week’s meeting.

(Reporting by Howard Schneider and Lindsay Dunsmuir; Additional reporting by Jonathan Spicer, Jason Lange, Lucia Mutikani and Megan Cassella; Editing by David Chance and Paul Simao)