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The Star Online: Business

Wall St Week Ahead - A burst of energy with Exxon, Chevron on tap

Posted: 26 Apr 2014 04:24 AM PDT

NEW YORK: Since late February, when investors fell out of love with biotechnology and other high-flying stocks, the market's fuel has been oil.

Energy names have been the best-performing sector in the S&P 500 since Feb. 25 when the selloff in high-growth stocks began. The sector will look to build on recent gains when bellwethers Exxon Mobil Corp, Chevron Corp and ConocoPhillips report results next week.

The rotation to value has limited the broader market's selloff. That could continue: Morgan Stanley said in a recent note that strong rotations to value names are usually followed by longer periods of value leadership.

Energy sector funds have attracted inflows in nine of the past 10 weeks; flows have averaged $488.9 million weekly over the last four weeks, the most since March 2011, according to Lipper, a Thomson Reuters company.

On a total return basis, energy is up more than 7 percent since Feb. 25, compared with a gain of just over 2 percent for the S&P 500 and a loss of 1.8 percent on healthcare, the worst-performing sector in that period.

"These big energy companies that pay dividends and have solid buyback programs are more defensive in nature as long as the price of the underlying commodity holds up," said Mike O'Rourke, chief market strategist at JonesTrading in Greenwich, Connecticut.

Both Exxon and Chevron rank among the top 10 dividend payers in terms of absolute dollars, according to S&P Dow Jones Indices. With a price-to-earnings ratio of 14.2, significantly below the S&P 500's 17.8, energy should continue to attract investors as the rotation to value continues.

"A lot of the major oil companies are entering the next phase of their life cycle, where there's more of an emphasis on profitability and cost control," said Faisel Khan, senior oil equity analyst at Citi in New York.

"We think that returns have a pretty good chance of growing from here."

Halliburton Co, the world's No.2 oilfield services provider, said earlier this week that their customers are stepping up spending to drill and complete wells as operating budgets swell. Schlumberger Ltd and Baker Hughes Inc also spoke of improved markets in North America.

According to the U.S. Federal Reserve, capacity utilization in the oil extraction sector currently sits at 99.2 percent of total capacity, far exceeding the average over the previous 40 years of about 92 percent.

So far in this earnings period, 14 energy names have reported results, with 11 - or 79 percent - exceeding estimates, making energy No. 1 among sectors with more than 10 companies reporting.

"With investors generally underweight Big Oils, there are early signs that significant negative consensus EPS revisions are likely leveling off," said Asit Sen, an analyst at Cowen & Co, referring to earnings per share estimates in a note this week. - Reuters

China to further ease currency controls for multi-nationals in pilot

Posted: 26 Apr 2014 04:19 AM PDT

BEIJING: China will expand a trial programme to make it simpler for multi-national firms to transfer funds within and outside the country, in a move that will further open its tightly controlled capital account.

The experiment, which began in 2012 in Beijing and Shanghai, came in response to growing demand from international companies operating in China for more freedom to use their growing amounts of yuan to boost the efficiency of their management of capital.

However, Chinese regulators have also been keen to keep any speculative pressures on the currency at bay.

The State Administration of Foreign Exchange (SAFE), which manages the country's $3.3 trillion foreign exchange reserves, is expanding the trial programme to any Chinese or foreign company with operations inside or outside China with an annual forex income of over $100 million, the regulator said in a statement on its website late on Friday.

One of the goals of the trial programme is to "explore and reproduce a mechanism for the capital account convertability system", SAFE said.

The new rule, which would take effect from June, will allow multi-national companies to open overseas and domestic accounts simultaneously as well as conduct collection and settlement of accounts in foreign exchange.

It allows free transfer of overseas accounts within the company without quota caps, while domestic accounts will continue to have limits.

Firms say the freer flow of funds across China's borders would boost efficiency and cut costs.

China has pledged to allow market forces to play a greater role in the economy and its markets.

Beijing wants to expand the Chinese currency's footprint beyond Hong Kong, where more than 80 percent of yuan trade settlement transactions are handled, and foster greater confidence among offshore businesses to adopt the yuan as a currency for trade. - Reuters

Japan, US tiptoe into new phase of Pacific trade talks

Posted: 26 Apr 2014 04:14 AM PDT

WASHINGTON: The United States and Japan are edging into a new phase of trade negotiations after US President Barack Obama and Japanese Prime Minister Shinzo Abe's summit, people with knowledge of talks to create one of the world's biggest trade pacts said.

Talks on the Trans-Pacific Partnership, a 12-nation bloc which would span 40 percent of the world economy and extend from Asia to Latin America, have been deadlocked as the United States and Japan stared off over farm and auto exports.

Although Obama and Abe did not announce an end to the stalemate at Thursday's meeting in Tokyo, a joint statement issued shortly before Obama left on Friday said the two countries identified a "path forward" on key issues, a contrast to the "gaps" highlighted after previous talks.

Briefing reporters on the president's plane from Japan, a senior U.S official said negotiators set the parameters for agreement on Japan's sensitive sugar, beef, pork, rice, dairy and wheat sectors, involving which trade barriers to eliminate, which to reduce, and over which time period.

"There are these parameters, and there are trade-offs among parameters. The deeper the cut in the tariff, the longer time it may take to get there," he said.

A U.S. congressional aide briefed on the negotiations said there was momentum heading into TPP negotiations in Vietnam in May, where concrete trade-offs could be made.

"That's the first time we have seen the Japanese moving in our direction," said the aide, who declined to be identified because of the sensitive nature of the discussions.

"We were on a path of gridlock and now there seems to be a path forward, if you're a trade negotiator you've got to be excited about that."

Trade experts said the administration comments pointed to a long phase-out period for tariffs Japan was prepared to move on such as beef, which it agreed to cut in a deal with Australia weeks earlier, while allowing continued protection for sectors such as rice.

"That's something that the United States can do, because U.S. negotiators are not under extreme political pressure to get a comprehensive reform on rice," said Peterson Institute for International Economics trade analyst Jeffrey Schott.

Officials from other TPP countries noted U.S. recognition of the role market access played in persuading other TPP partners to sign up to common rules on issues such as intellectual property, important to the United States and Japan.

For big agricultural exporters such as Canada, New Zealand and Australia, access to Japan's markets might offset doubts about the intellectual property rules.

"Once it's clear that there is going to be a U.S.-Japan deal that is perceived to be a good deal for everybody ... there will be decisions made," the aide said. "There will be trade-offs, trade-offs not just in the market access talks but trade-offs within the rules package as well, across the entire agreement."

The joint statement also called on other trading partners to take steps needed to conclude the agreement, making clear the United States and Japan do not want to bear the burden alone.

"It's going to take all 12 countries, not two, in order for TPP to cross the finish line," said Alston & Bird policy adviser Eric Shimp, a former U.S. Trade Representative negotiator.

But Japan would likely have to go into more detail about its concessions to prompt Canada to open up its dairy and poultry markets.

"It's hard for me to see Canada offering more market access, or showing its hand, before Japan does. The sequence is fairly clear," said McDermott Will & Emery partner Jay Eizenstat, also a former USTR negotiator. - Reuters


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