Putin and Erdogan push for Syria talks without U.S. or U.N.

By Andrew Osborn and Nick Tattersall

MOSCOW/ISTANBUL (Reuters) – President Vladimir Putin said he and his Turkish counterpart Tayyip Erdogan are working to organize a new series of Syrian peace talks without the involvement of the United States or the United Nations.

In a snub to Washington, Putin made clear on Friday that the initiative was the sole preserve of Moscow and Turkey and that the peace talks, if they happened, would be in addition to intermittent U.N.-brokered negotiations in Geneva.

“The next step is to reach an agreement on a total ceasefire across the whole of Syria,” Putin said in Tokyo. “We are conducting very active negotiations with representatives of the armed opposition, brokered by Turkey.”

Putin, who has leveraged Russia’s role in Syria to boost his diplomatic muscle, said the talks proposal was being put to the Syrian government and the opposition. Kazakhstan, the proposed venue, is a Russian ally, and Putin said the talks could take place in Astana, the Kazakh capital.

The surprise move underlines the growing strength of Moscow’s rapprochement with Ankara, with which it fell out last year over the shooting down of a Russian plane, and reflects Russia’s desire to cement its growing influence in the Middle East and more widely.

It also shows how fed up Russia is with what it sees as long and pointless talks with the Obama administration over Syria. Russian Foreign Minister Sergei Lavrov earlier this week dismissed those talks as “fruitless sitting around” and said Ankara might prove a more effective partner on Syria.

Turkey, which wants to boost its global sway too, is also deeply frustrated by U.S. policy in Syria, particularly Washington’s support for Kurdish militia fighters it sees as a hostile force, and by what it views as Barack Obama’s failure to give enough support to the rebels.

Putin played down the idea that the talks would sideline or overshadow similar talks brokered by the United Nations that have been held intermittently in Geneva.

“It won’t compete with the Geneva talks, but will complement them. Wherever the conflicting sides meet, in my view it is the right thing to do to try to find a political solution,” he said.

The initiative is unlikely to go down well with U.N. envoy for Syria Staffan de Mistura however. He told reporters in Paris on Thursday that it was time for all sides to return to the table, but the United Nations would have to broker any talks for them to have legitimacy.

ODD COUPLE

Russia still hopes it can co-operate on Syria with the United States and join forces with Washington against Islamic State once President-elect Donald Trump takes office.

But Trump will not be inaugurated until Jan. 20, leaving a power vacuum, and is likely in any case to need some time to formulate foreign policy.

The alliance between Moscow and Ankara is at first glance an odd one. Russia is one of Syrian President Bashar al-Assad’s closest allies, while Turkey, a NATO member, wants him removed.

But Ankara may be ready to accept a transition in which Assad is involved, provided he ultimately relinquishes power.

Turkey’s main priority, on which it will want at least tacit Russian agreement, is to ensure that Kurdish militias are unable to gain further territory in Syria along its borders.

Ankara launched an incursion into Syria, “Operation Euphrates Shield”, in August to push Islamic State out of a 90-km (55-mile) stretch of frontier territory and prevent Kurdish groups from seizing ground in their wake.

Deputy Prime Minister Nurettin Canikli acknowledged two weeks ago that Turkey “would not have moved so comfortably” without the rapprochement with Russia, which effectively controls parts of northern Syrian air space.

Turkey now wants the rebels it supports to push further south into Syria and take the Islamic State-held city of al-Bab, around 40 km northeast of Aleppo.

Erdogan is determined that the Turkish-backed rebels capture the city to prevent Kurdish militias from doing so. But that ambition could cause difficulties with Moscow, as al-Bab lies close to the front lines of Assad’s allies.

ALEPPO DEAL

Putin had only warm words for the prospect of deeper Russo-Turkish co-operation however and said the evacuation of rebels from Aleppo was something that he and Erdogan had agreed on.

He hoped the Syrian army would be able to consolidate its position in Aleppo and civilians return to normal life.

The RIA agency this week quoted Andrei Kelin, a senior Russian Foreign Ministry official, as saying it had been easier to deal with Turkey on Aleppo than the United States.

“It was much more straightforward to reach agreements with Turkey than with the Americans,” he was cited as saying.

Putin played down the Syrian government’s recent loss of Palmyra to Islamic State, blaming the lack of coordination between the U.S. led coalition, the Syrian authorities, and Russia for the setback.

“Everything that is happening in Palmyra is the result of uncoordinated action,” said Putin.

“The question of Palmyra is purely symbolic. Aleppo is much more important from a military-political point of view.”

(Additional reporting by Katya Golubkova in Tokyo and John Irish in Paris; Editing by Giles Elgood)

U.S. retail sales slow in November; producer prices increase

A woman sits in Herald Square with bags of shopping during Black Friday sales in Manhattan, New York,

By Lucia Mutikani

WASHINGTON (Reuters) – U.S. retail sales barely rose in November as households cut back on purchases of motor vehicles, suggesting some loss of momentum in economic growth in the fourth quarter.

Other data on Wednesday pointed to steadily rising inflation pressures, with producer prices notching their largest increase in five months in November. The moderation in retail sales came after two straight months of strong gains. With incomes rising and household wealth at record highs, the cool-off in retail sales is likely to be temporary.

Against the backdrop of a tightening labor market and perking inflation, the Federal Reserve is expected to raise interest rates later on Wednesday. The U.S. central bank hiked its overnight benchmark interest rate last December for the first time in nearly a decade.

“There is still strong support for consumer spending, namely steady job growth and wages heading higher. Santa will still be coming to town this year.” said Jennifer Lee, a senior economist at BMO Capital Markets in Toronto.

Retail sales edged up 0.1 percent last month after rising 0.6 percent in October, the Commerce Department said. Sales were up 3.8 percent from a year ago. Excluding automobiles, gasoline, building materials and food services, retail sales also nudged up 0.1 percent last month after gaining 0.6 percent in October.

These so-called core retail sales correspond most closely with the consumer spending component of gross domestic

product. Economists had forecast overall retail sales increasing 0.3 percent and core sales also gaining 0.3 percent last month.

In a separate report, the Labor Department said its producer price index for final demand increased 0.4 percent last month, the largest gain since June, after being unchanged in October.

In the 12 months through October, the PPI rose 1.3 percent, the biggest gain since November 2014. The PPI rose 0.8 percent in the 12 months through October.

A 0.5 percent increase in the cost of services accounted for more than 80 percent of the rise in the final demand PPI last month. The increase, which followed a 0.3 percent decline in October, was the largest since January.

With producer prices pushing higher, overall inflation is expected to steadily move toward the Fed’s 2 percent target.

The dollar fell to a session low against the yen on the retail sales data, while prices for longer-dated U.S. government bonds rose. U.S. stock index futures fell slightly.

The softer-than-expected retail sales numbers last month suggest a slowdown in consumer spending in the fourth quarter, which could see economists trim their GDP forecasts for the period. Still, consumers should continue to support the economy in the fourth quarter.

The Atlanta Fed is forecasting GDP rising at a 2.6 percent annualized rate in the fourth quarter. The economy grew at a 3.2 percent pace in the third quarter.

Last month, auto sales fell 0.5 percent, the largest decline since March, after increasing 0.5 percent in October. Sales at building material stores rose 0.3 percent.

Receipts at clothing stores were flat, suggesting a weak start to the holiday shopping season. Department stores like Macy’s <M.N> and Kohl’s <KSS.N> are facing intense competition from online retailers such as Amazon <AMZN.O>, which have snatched a large chunk of the market share.

Sales at online retailers gained 0.1 percent last month after surging 1.4 percent in October. Receipts at restaurants and bars increased 0.8 percent, while sales at sporting goods and hobby stores fell 1.0 percent. Receipts at service stations gained 0.3 percent after jumping 2.5 percent in October.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)

U.S. ready to confront Beijing on South China Sea: admiral

Guided missile destroyer in South China Sea

By Colin Packham

SYDNEY (Reuters) – The United States is ready to confront China should it continue its overreaching maritime claims in the South China Sea, the head of the U.S. Pacific fleet said on Wednesday, comments that threaten to escalate tensions between the two global rivals.

China claims most of the resource-rich South China Sea through which about $5 trillion in ship-borne trade passes every year. Neighbors Brunei, Malaysia, the Philippines, Taiwan and Vietnam also have claims.

The United States has called on China to respect the findings of the arbitration court in The Hague earlier this year which invalidated its vast territorial claims in the strategic waterway.

But Beijing continues to act in an “aggressive” manner, to which the United States stands ready to respond, Admiral Harry Harris, head of the U.S. Pacific Command, said in a speech in Sydney.

“We will not allow a shared domain to be closed down unilaterally no matter how many bases are built on artificial features in the South China Sea,” he said. “We will cooperate when we can but we will be ready to confront when we must.”

The comments threaten to stoke tensions between the United States and China, already heightened by President-elect Donald Trump’s decision to accept a telephone call from Taiwan’s president on Dec. 2 that prompted a diplomatic protest from Beijing.

Asked about Harris’s remarks, Chinese Foreign Ministry spokesman Geng Shuang said the situation in the South China Sea was currently stable, thanks to the hard work of China and others in the region.

“We hope the United States can abide by its promises on not taking sides on the sovereignty dispute in the South China Sea, respect the efforts of countries in the region to maintain peace and stability in the South China Sea region and do more to promote peace and stability there,” he told a daily news briefing.

The United States estimates Beijing has added more than 3,200 acres (1,300 hectares) of land on seven features in the South China Sea over the past three years, building runways, ports, aircraft hangars and communications equipment.

In response, the United States has conducted a series of freedom-of-navigation operations in the South China Sea, the latest of which came in October.

The patrols have angered Beijing, with a senior Chinese official in July warning the practice may end in “disaster”.

Harris said it was a decision for the Australian government whether the U.S. ally should undertake its own freedom-of-navigation operations, but said the United States would continue with the practice.

“The U.S. fought its first war following our independence to ensure freedom of navigation,” said Harris. “This is an enduring principle and one of the reasons our forces stand ready to fight tonight.”

(Additional reporting by Ben Blanchard in Beijing; Editing by Lincoln Feast and Jacqueline Wong)

U.S. strike kills Islamic State militants linked to Paris attacks

A man pays his respects during a gathering at the Place de la Republique in Paris, France, November 13, 2016, after ceremonies held for the victims of last year's Paris attacks which targeted the Bataclan concert hall as well as a series of bars and killed 130 people.

WASHINGTON (Reuters) – A U.S. drone strike in Syria last week killed two Islamic State leaders linked to the Nov. 13, 2015 attacks in Paris that killed 130 people as well as a third militant convicted in absentia in Belgium for a disrupted plot, the Pentagon said on Tuesday.

The U.S. military said the strike took place on Dec. 4 in Raqqa, the Islamic State’s defacto capital in Syria.

“They were working together to plot and facilitate attacks on Western targets at the time of the strike,” Pentagon spokesman Captain Jeff Davis told reporters.

The Pentagon named two of the militants as Salah Gourmat and Sammy Djedou and said both men were involved with facilitating the 2015 machinegun and suicide bomb attacks on the Bataclan music hall, Paris bars and restaurants, and the Stade de France soccer stadium.

The third man killed, Walid Hamman, was a suicide attack planner and French national who was convicted in absentia in Belgium for a plot disrupted in 2015, Davis told reporters.

The three men were killed when a drone aircraft fired on them as they were driving in a car together, Davis said.

Islamic State, which has controlled parts of Iraq and Syria in recent years, has lost territory this year to local forces in those countries supported by a U.S.-led coalition of air strikes and advisers. Islamic State sympathizers around the world have carried out other shootings and bombings of civilians.

(Reporting by Phil Stewart; Editing by Will Dunham)

U.S. to halt some arms sales to Saudi, citing civilian deaths in Yemen campaign

A Saudi soldier fires a mortar towards Houthi movement position, at the Saudi border with Yemen

By Phil Stewart and Warren Strobel

WASHINGTON (Reuters) – The United States has decided to limit military support to Saudi Arabia’s campaign in Yemen because of concerns over widespread civilian casualties and will halt a planned arms sale to the kingdom, U.S. officials told Reuters.

The United States will also revamp future training of the kingdom’s air force to focus on improving Saudi targeting practices, a persistent source of concern for Washington.

The decision reflects deep frustration within President Barack Obama’s government over Saudi Arabia’s practices in Yemen’s 20-month-old war, which has killed more than 10,000 people and sparked humanitarian crises, including chronic food shortages, in the poorest country in the Middle East.

It could also further strain ties between Washington and Riyadh in the remaining days of Obama’s administration and put the question of Saudi-U.S. relations squarely before the incoming administration of President-elect Donald Trump, who takes office on Jan. 20.

A Saudi-led military coalition intervened in Yemen’s civil war in March 2015 and has launched thousands of air strikes against the Iran-allied Houthi movement.

Rights groups say attacks on clinics, schools, markets and factories may amount to war crimes. Saudi Arabia has either denied the attacks or cited the presence of fighters in the targeted areas and has said it has tried to reduce civilian casualties.

An Obama administration official, who spoke on condition of anonymity, said “systemic, endemic” problems in Saudi Arabia’s targeting drove the U.S. decision to halt a future weapons sale involving precision-guided munitions.

“We’ve decided not to move forward with some foreign military sales cases for air-dropped munitions, PGMs (precision-guided munitions),” the official said.

“That’s obviously a direct reflection of the concerns that we have about Saudi strikes that have resulted in civilian casualties,” the official said. A second official confirmed the decision to suspend the sale of certain weaponry.

The officials declined to offer details. But a specific case put on hold appeared to involve the sale of hundreds of millions of dollars worth of guidance systems manufactured by Raytheon Co that convert dumb bombs into precision-guided munitions that can more accurately hit their targets.

At the same time, the United States has decided to increase efforts to address long-standing Saudi concerns by focusing more on border security, the official said. The kingdom has been subject to cross-border attacks by the Iran-allied Houthis.

“They’ve made a very strong request for greater intelligence sharing and more support for their border,” the official said.

There was no immediate comment from Saudi embassy officials.

The White House launched a review of U.S. assistance for the Saudi-led coalition after planes struck mourners at a funeral in the capital, Sanaa, in October, killing 140 people, according to one U.N. estimate.

The United Nations human rights office said in August that the Saudi-led coalition was responsible for roughly 60 percent of the 3,800 civilians killed since March 2015.

Human rights groups have criticized the United States for supporting the Saudi war effort by selling the kingdom arms and refueling coalition jets. The United States says it has not vetted or selected Saudi targets in Yemen.

The Obama administration official said the United States would not halt refueling of the Saudi-led coalition planes.

“For now that’s not going to be touched. Again, the review could continue and people could make a different decision in the coming weeks,” the official said.

SMART VERSUS DUMB BOMBS

The decision to suspend the arms sale to the Saudis marks a reversal for the administration. Officials have long argued that supplying so-called “smart weapons” helped in reducing civilian casualties.

Last year, the Obama administration even had the U.S. military send precision-guided munitions from its own stocks to replenish dwindling Saudi-led coalition supplies, a source close to the Saudi government has said.

But that argument ultimately failed to convince the Obama administration during its review, which the first official said was still ongoing.

“It’s not a matter of how smart or dumb the bombs are, it’s that they’re not picking the right targets. The case in point … is the one on the funeral,” the official said.

The airstrikes on the funeral took place after the Saudi-led coalition received incorrect information from Yemeni military figures that armed Houthi leaders were in the area, an investigative body set up by the coalition said in October.

In an effort to reduce civilian casualties, the United States gave the Saudis detailed lists of sites to avoid bombing, Reuters has previously reported. But jets in the Saudi-led coalition have hit at least one target on that list.

US STILL SELLING HELICOPTERS

Earlier this year, the U.S. military reduced the number of U.S. military personnel coordinating with the Saudi-led coalition’s air campaign, slashing it to six people from a peak of 45 personnel.

“Their responsibilities are being adjusted and limited so that they are less enmeshed in some of the offensive operations in Yemen,” the official said.

Reuters reported earlier this year on concerns by some U.S. officials that the United States could be implicated in possible Saudi violations of the laws of war.

In the view of some officials, U.S. refueling and logistical support of Riyadh’s air force – even more than the arms sales – risked making the United States a party to the Yemen conflict under international law.

In May, Washington suspended sales to Riyadh of cluster munitions, which release dozens of bomblets and are considered particularly dangerous to civilians.

Last week, the State Department announced plans to sell Saudi Arabia CH-47F Chinook cargo helicopters and related equipment, training and support worth $3.51 billion. U.S. officials said the weaponry would help Saudi defend its border, not conduct offensive operations in Yemen.

(Editing by Yara Bayoumy and Ross Colvin)

Drinking, drug use largely down among U.S. teens in 2016

By Dan Whitcomb

LOS ANGELES (Reuters) – The use of alcohol, marijuana, prescription medications and illicit substances declined among U.S. teens again in 2016, continuing a long-term trend, according to a study released on Tuesday by the National Institutes of Health.

But the research found that high school seniors were still using cannabis at nearly the same levels as in 2015, with 22.5 percent saying that had smoked or ingested the drug at least once within the past month and 6 percent reporting daily use.

“Clearly our public health prevention efforts, as well as policy changes to reduce availability, are working to reduce teen drug use, especially among eighth graders,” Dr. Nora Volkow, director of the National Institute on Drug Abuse, said in a statement accompanying the study results.

“However, when 6 percent of high school seniors are using marijuana daily, and new synthetics are continually flooding the illegal marketplace, we cannot be complacent,” Volkow said.

The annual survey, part of a series called Monitoring the Future which has tracked drug, alcohol and tobacco use among teens since 1975, also found that during 2016 there was a higher use of pot among 12th graders in states with medical marijuana laws.

According to the study, marijuana and e-cigarettes are more popular among teens than regular tobacco, with a large drop in the use of tobacco cigarettes among 8th, 10th and 12th graders.

In 2016, 1.8 percent of high school seniors smoked half a pack or more of tobacco cigarettes per day, compared with 10.7 percent in 1991.

The use of alcohol has seen similar declines, according to the research, with 37.3 percent of 12th graders reporting this year that they had been drunk at least once, down from a peak of 53.2 percent in 2001.

The analysis found that the use of illicit drugs other than marijuana by teens was at its lowest levels since tracking began.

The study, which is sponsored by the Substance Abuse and Mental Health Services Administration and conducted by researchers at the University of Michigan at Ann Arbor, surveyed 45,473 students from 372 public and private schools.

(Reporting by Dan Whitcomb; Editing by Lisa Shumaker)

Thousands flee Aleppo onslaught as battle reaches climax

Aleppo family flees war zone

By Laila Bassam and Stephanie Nebehay

ALEPPO, Syria/GENEVA (Reuters) – Thousands of people fled the front lines of fighting in Aleppo on Tuesday as the Syrian military hammered the final pocket of rebel resistance and Russia rejected an immediate ceasefire.

The rout of rebels from their ever-shrinking territory in Aleppo sparked a mass flight of civilians and insurgents in bitter weather, a crisis the United Nations said was a “complete meltdown of humanity” with civilians being shot dead.

The U.N. human rights office said it had reports of abuses, including that the army and allied Iraqi militiamen summarily killed at least 82 civilians in captured districts of the city, once a flourishing economic center with renowned ancient sites.

“The reports we had are of people being shot in the street trying to flee and shot in their homes,” said Rupert Colville, spokesman for the U.N. office. “There could be many more.”

Behind those fleeing was a wasteland of flattened buildings, concrete rubble and bullet-pocked walls, where tens of thousands had lived until recent days under intense bombardment even after medical and rescue services had collapsed.

Colville said the rebel-held area was “a hellish corner” of less than a square kilometer, adding its capture was imminent.

The Syrian army and its allies are in the “last moments before declaring victory” in Aleppo, a Syrian military source said, after rebel defences collapsed, leaving insurgents in a tiny, heavily bombarded pocket of ground.

Turkish and Russian officials will meet on Wednesday to examine a possible ceasefire and opening a corridor, a senior Turkish official, who declined to be identified, told Reuters.

But Moscow, the Syrian government’s most powerful ally, rejected any immediate call for a ceasefire. “The Russian side wants to do that only when the corridors are established,” Russian Foreign Minister Sergei Lavrov said on Tuesday.

The spokesman for the civil defence force in the former rebel area of Aleppo said rebels now controlled an area of less than three sq km. “The situation is very, very bad. The civil defence has stopped operating in the city,” he told Reuters.

A surrender or withdrawal of the rebels from Aleppo would mean the end of the rebellion in the city, Syria’s largest until the outbreak of war after mass protests in 2011, but it is unclear if such a deal can be struck by world powers.

By finally dousing the last embers of resistance burning in Aleppo, Syrian President Bashar al-Assad’s military coalition of the army, Russian air power and Iran-backed militias will have delivered him his biggest battlefield victory of the war.

However, while the rebels, including groups backed by the United States, Turkey and Gulf monarchies, as well as jihadist groups that the West does not support, will suffer a crushing defeat in Aleppo, the war will be far from over.

“FLEEING IN PANIC”

Aleppo’s loss will leave the rebels without a significant presence in any of Syria’s main cities, but they still hold much of the countryside west of Aleppo and the province of Idlib, also in northwest Syria.

Islamic State also has a big presence in Syria and has advanced in recent days, taking the desert city of Palmyra.

The army and its allies had taken full control over all the Aleppo districts abandoned by rebels during their retreat in the city, a Syrian military source said on Tuesday.

After days of intense bombardment of rebel-held areas, the rate of shelling and air strikes dropped considerably late on Monday and through the night as the weather deteriorated, a Reuters reporter in the city said.

However, rocket fire pounded rebel-held areas, the Syrian Observatory for Human Rights, a British-based war monitor, reported. Rebels and government forces still fought at points around the reduced enclave, the Observatory said.

The U.N. children’s agency UNICEF cited an unnamed doctor in Aleppo as saying that many unaccompanied children were trapped in a building that was under attack, but the Syrian Observatory for Human Rights said it had no knowledge of the incident.

“Artillery shelling is continuing but because of the weather the aerial bombing has stopped. Many of the families and children have not left for areas under the control of the regime because their fathers are from the rebels,” said Abu Ibrahim, a resident of Aleppo in a text message.

Colville said he feared retribution. “In all, as of yesterday evening we have received reports of pro-government forces killing at least 82 civilians, including 11 women and 13 children,” Colville told a news briefing, naming the Iraqi armed group Harakat al-Nujaba as reportedly involved in the killings.

The military official said the rebels were fleeing “in a state of panic”, but a Turkish-based official with the Jabha Shamiya insurgent group in Aleppo said on Monday night that they had established a new frontline along the river.

“The bombardment is not on the frontlines, the greater burden of the bombardment is on the civilians, and this is what is causing a burden on us,” the official said.

Terrible conditions were described by city residents.

Abu Malek al-Shamali, a resident in the rebel area, said dead bodies lay in the streets. “There are many corpses in Fardous and Bustan al Qasr with no one to bury them,” he said.

“Last night people slept in the streets and in buildings where every flat has several families crowded in,” he added.

Celebrations on the government side of the divided city lasted into Monday night, with fighters shooting rounds into the sky in triumph.

TIDE OF REFUGEES

A daily bulletin issued by the Russian Defence Ministry’s “reconciliation center” from the Hmeimin airbase used by its warplanes, reported that more than 8,000 civilians, more than half of them children, had left east Aleppo in 24 hours.

State television broadcast footage of a tide of hundreds of refugees walking along a ravaged street, wearing thick clothes against the rain and cold, many with hoods or hats pulled tight around their faces, and hauling sacks or bags of belongings.

One man pushed a bicycle loaded with bags, another family pulled a cart on which sat an elderly woman. Another man carried on his back a small girl wearing a pink hat.

At the same time, a correspondent from a pro-Damascus television station spoke to camera from a part of Aleppo held by the government, standing in a tidy street with flowing traffic.

In some recaptured areas, people were returning to their shattered homes. A woman in her sixties, who identified herself as Umm Ali, or “Ali’s mother”, said that she, her husband and her disabled daughter had no water.

They were looking after the orphaned children of another daughter killed in the bombing, she said, and were reduced to putting pots and pans in the street to collect rainwater.

In another building near al-Shaar district, which was taken by the army last week, a man was fixing the balcony of his house with his children. “No matter the circumstances, our home is better than displacement,” he said.

All around the buildings in that area were earthen fortifications and rebel slogans daubed on walls. But in a playground, all the equipment was burned.

(Reporting By Laila Bassam in Aleppo, Orhan Coskun in Ankara, Lisa Barrington and Tom Perry in Beirut, Suleiman al-Khalidi in Amman and Tom Miles and Stephanie Nebehay in Geneva; Writing by Angus McDowall in Beirut; Editing by Pravin Char and Peter Millership)

Oil surges to one-and-a-half-year high, Fed rate increase looms

A gas station attendant pumps fuel into a customer's car at PetroChina's petrol station in Beijing, China,

By Marc Jones

LONDON (Reuters) – Oil prices surged to their highest since mid-2015 and U.S. Treasury yields hit a more than two-year peak on Monday after the world’s top crude producers agreed to the first joint output cut since 2001.

Coming at the start of a week when the United States is expected to raise interest rates for the only the second time since the global financial crisis, the weekend agreement between the Organization of Petroleum Exporting Countries and key non-OPEC states set the markets alive.

Brent oil futures soared 5 percent to top $57 a barrel for the first time since July 2015 and U.S. crude leapt above $54 a barrel to send global inflation gauges spiking as well.

There was particular surprise as Saudi Arabia, the world’s number one producer, said it may cut its output even more than it had first suggested at an OPEC meeting just over a week ago.

“The original OPEC deal pointed to a fairly lumpy 3 percent cut (in production), so this suggests there is a bit more upside for oil prices,” said Neil Williams, chief economist at fund manager Hermes.

On the rise in bond yields, which tend to set global borrowing costs, he added: “The Fed hike is mostly baked in so when we do get it, it will be more about the statement.”

European oil companies jumped more than 2 percent on the oil surge and helped the pan-regional STOXX 50 index add 0.1 percent, having just had its best week in exactly five years.

Bond markets in contrast were under heavy pressure. Euro zone government bond yields were sharply higher with German Bunds up 5 basis points at 0.40 percent as U.S. yields topped 2.5 percent for the first time since October 2014.

“We have seen OPEC and non-OPEC producers agreeing, which is boosting reflation expectations around the world,” said Chris Weston, an institutional dealer with IG Markets.

In another sign of the reflation trade, breakeven rates –the gap between yields of five-year U.S. debt and a matching tenor in inflation-protected securities — were at two-month highs.

Wall Street futures, meanwhile, pointed to the main U.S. indexes barely budging when they resume, having enjoyed an uninterrupted gain of nearly 4 percent over the past six sessions.

FED UP

Focus was also on the currency markets as the dollar rose to its highest since February against the Japanese yen, before what is almost certain to be the first rate hike of the year from the U.S. Federal Reserve on Wednesday.

Japan’s yen also tends to suffer when oil prices rise, since the country is a major importer.

The Norwegian crown, Canadian dollar and Russia rouble were the big gainers from the oil deal. The rouble rose almost 2 percent against both the dollar and euro as Russia shares, which have rocketed almost 90 percent since January, hit the latest in a string of record highs.

Overnight in Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan dropped 0.5 percent after posting its biggest weekly rise in nearly three months last week.

China stocks suffered their biggest fall in six months as blue chips were knocked by fresh regulatory curbs to rein in insurers’ aggressive stock investments and rising bond yields prompted profit-taking in equities.

The blue-chip CSI300 index fell 2.4 percent, to 3,409.18 points, while the Shanghai Composite Index lost 2.5 percent to 3,152.97 points.

China’s insurance regulator, which recently warned it would curb “barbaric” acquisitions by insurers, said late on Friday it had suspended the insurance arm of China’s Evergrande Group from conducting stock market investment.

Concerns were also rumbling about U.S.-Sino relations after Donald Trump re-ignited controversy over Taiwan.

“I fully understand the ‘one China’ policy, but I don’t know why we have to be bound by a ‘one China’ policy unless we make a deal with China having to do with other things, including trade,” Trump said in an interview with Fox News.

Emerging markets are already bracing for a difficult run if U.S. rate hikes push up the dollar and global bond yields.

Turkey’s lira has borne the brunt of much of the pressure in recent weeks, and it took another 1 percent hit alongside a sharp fall in Turkish bonds after data showed the country’s economy suffering its first contraction since 2009.

Gold, meanwhile, which had a bumper first half of 2016, hit its lowest level since early February at $1,152 an ounce.

(Additional reporting by Saikat Chatterjee in Hong Kong, editing by Larry King)

Snow, cold to sweep across U.S. Northeast ahead of arctic blast

Person walking in high snow

(Reuters) – A snowstorm that pummeled the Midwest and grounded hundreds of flights will sweep across the U.S. Northeast on Monday, creating tough travel conditions ahead of the season’s first arctic blast, forecasters said.

The cold front that dumped more than 10 inches (25 cm) of snow on northern Illinois has prompted winter storm warnings and advisories as it also brings sleet and rain to New England and parts of the Middle Atlantic states, the National Weather Service said.

Accuweather, a private forecaster, said three to six inches (7.5 to 15 cm) of snow was expected to snarl travel in northern New York and New England. Local accumulations could be higher.

Conditions were expected to improve late on Monday as the system moves through the region. FlightAware, which tracks air travel, said 190 U.S. flights had been canceled on Monday after 1,800 were grounded on Sunday, mostly at Chicago’s two main airports.

The National Weather Service said another arctic air mass would spread over the northern Great Plains and Midwest in the next couple of days and then head east.

In the Northeast, “the cold weather will be more significant as we get into Thursday,” weather service meteorologist Brian Hurley said.

Accuweather said high temperatures would be in the single digits F (-17 to -12 C) to just below zero F (-18 C) from the Dakotas through Minnesota and Wisconsin as the cold air grips the region.

(Reporting By Ian Simpson in Washington; Editing by Daniel Wallis and Meredith Mazzilli)

Midwest snow storm grounds hundreds of Chicago flights

Person walking in high snow

(Reuters) – Hundreds of flights into and out of Chicago’s O’Hare and Midway airports were canceled on Sunday as a winter storm system dumped moderate to heavy snow on the Upper Midwest and Lower Great Lakes regions before heading toward the U.S. Northeast.

A winter storm warning was in effect in the Chicago area on Sunday afternoon, with total accumulations of up to 10 inches (25 cm) expected by midnight CST, the National Weather Service said.

It warned of difficult driving conditions in and around the country’s third-biggest metropolitan area, where snow began falling on Saturday afternoon.

As much as 13 inches of snow fell in parts of Michigan and up to 9 inches in parts of Minnesota by 8 a.m. CST on Sunday, according to the National Weather Service.

At O’Hare International Airport, the world’s fourth-busiest airport, United Air Lines and American Airlines have scratched most regional flights and some mainline service, while Southwest Air has canceled most flights out of Midway International on Sunday evening and Monday morning, the airports said.

Passengers took to Twitter to vent their frustrations over one of the first winter storms to snarl air traffic in the region this season.

“To all our fans in Vegas – we are stuck in Chicago from the snow storm, we are so so sorry. Winter weather is (sic) wrecked our plans. This sucks,” wrote the rock band One Republic in a Twitter post. The group had a show scheduled on Sunday night at the Hard Rock Hotel & Casino in Las Vegas, Nevada.

All told, more than 1,200 flights into and out of O’Hare were canceled as of Sunday afternoon, according to the Flightaware tracking service, while nearly 200 Midway flights were scratched.

At Detroit’s Metropolitan Wayne County Airport, a Delta flight arriving from Buffalo, New York, skidded off the runway and came to a stop on a grassy verge around midday on Sunday, but there were no injuries, local media reported.

Representatives of the airport and the airline could not be reached immediately to confirm the reports.

(Reporting By Frank McGurty; Editing by Alan Crosby)