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U.S. data offers hope for manufacturing; jobs market steady

WASHINGTON Factory activity in the U.S. Midwest surged to its highest in almost 1-1/2 years in June amid strong gains in new orders and production, offering a ray of hope for the downtrodden manufacturing sector.

While another report on Thursday showed an increase in the number of Americans filing for unemployment benefits last week, layoffs remained low in June, backing views the labor market remained healthy despite last month’s paltry job gains.

The signs of stability in manufacturing and low layoffs added to consumer spending data in suggesting that economic growth regained speed in the second quarter.

But a cloud looms over the economy following Britain’s shock vote last week to leave the European Union. The so-called Brexit referendum unsettled markets and on Thursday, the International Monetary Fund said uncertainty over Britain’s departure was the biggest risk to the global economy.

“The unexpected Brexit decision could have material influence on how manufacturers view the near-term outlook. It could also impact firms’ hiring decisions over the coming months,” said Sam Bullard, a senior economist at Wells Fargo Securities in Charlotte, North Carolina.

The Institute for Supply Management-Chicago said its business barometer jumped 7.5 points to 56.8 this month, the highest since January 2015. The increase unwound the prior two months’ declines.

A gauge of new orders received by factories in the Midwest region surged to its highest since October 2014. A measure of backlogged orders was the highest in more than five years, after contracting for 16 consecutive months.

At the same time, manufacturers reported that production was at a five-year high and inventories were growing again.

U.S. stocks .SPX rose for a third straight day, in line with global markets. The dollar .DXY was little changed against a basket of currencies, while prices for U.S. government debt US10YT=RR rose.


While the ISM-Chicago survey is volatile, it mirrored similar gains in some other regional factory surveys. Both the New York and Philadelphia Federal Reserve Banks this month reported rebounds in factory activity in New York state and mid-Atlantic region respectively. But their counterparts in Dallas and Richmond reported further slumps in activity.

The Institute for Supply Management is expected to report on Friday that its national factory index was little changed at 51.4 in June. A reading above 50 indicates expansion in the manufacturing sector, which accounts for about 12 percent of the U.S. economy.

Despite the improvement in sentiment surveys, data on factory orders, business spending and industrial production have shown manufacturing stuck in a rut since mid-2014 following a surge in the U.S. dollar.

Manufacturing has also been undermined by lower oil prices LCOc1 CLc1 which have put pressure on producers of energy-related equipment and efforts by businesses to reduce an inventory overhang have also inflicted pain.

In a separate report, the U.S. Labor Department said initial claims for state unemployment benefits increased 10,000 to a seasonally adjusted 268,000 for the week ended June 25.

Claims have now been below 300,000, a threshold associated with a strong jobs market, for 69 consecutive weeks, the longest streak since 1973. The four-week moving average of claims, considered a better measure of labor market trends as it irons out week-to-week volatility, was unchanged at 266,750 last week.

“The trend in the claims data has improved since late in May, supporting our view that the sharp weakening in May payrolls overstated any underlying softening in the labor market,” said Daniel Silver, an economist at JPMorgan in New York.

Non-farm payrolls increased only 38,000, the smallest gain since September 2010. A Reuters survey of economists forecast payrolls rising 180,000 in June. The Labor Department will publish its June employment report on July 8.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci and James Dalgleish)

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World stocks poised for worst month since January

LONDON Global stocks were set for their worst monthly performance since January, with renewed concerns over global growth forcing European shares and oil prices onto the back foot again following two positive sessions.

The MSCI All-Country World index .MIWD00000PUS was little changed on the day, but is set to end the month down 2.5 percent, its worst month since a troubled start to the year.

Worries that a weaker Chinese yuan could spark deflation, seen as a key reason for the worst beginning to the year for global stocks, were reignited after Reuters reported that China’s central bank was willing to let the currency fall further.

“Since the beginning of the year investors have faced a series of macro changes to the investment landscape,” said Sean Darby, chief global equity strategist at Jefferies, adding that Britain’s decision to leave the European Union last week was only the most recent shock to investor confidence.

The two-day selloff in the aftermath of last week’s vote wiped more than $3 trillion off the value of global stocks.

“No doubt global growth will take a short term hit, but it is not going to result in a credit crisis,” said Darby.

Bond markets see Brexit as another significant blow to the world economy with German and Japanese benchmark 10-year government debt yields both falling to historic lows below zero over the past week.

On stock markets, European shares were flat, while the FTSE 100 .FTSE was off 0.1 percent in early trading with financials the biggest drag on both indexes.

Shares of UK and European banks .SX7P, a center of concern since Britain shocked global financial markets on Friday, have been the hardest hit during the recent sell-off and are the worst performing sectors this year in their respective markets.

In currencies, sterling GBP=D4 was up 0.2 percent, putting distance between a 31-year trough of $1.3122 touched on Monday. It has still lost more than 6 percent in the quarter.

The euro, another casualty in the days after Brexit, fetched$1.1111 after reaching $1.0912 on Friday, its lowest since March.

Crude oil prices retraced some of their gains from Wednesday’s sharp rally as fears over strike outages in Norway abated.

Brent crude LCOc1 fell 0.9 percent at $50.10 a barrel after jumping more than 4 percent overnight, thanks to a larger-than-expected drawdown in U.S. crude inventories. [O/R]

Oil has mostly recovered what it lost after the Brexit shock. For the quarter, Brent has risen 26 percent on hopes that declining production in some countries would ease a global glut.

(Editing by Alexander Smith)

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Exclusive: China to tolerate weaker yuan, wary of trade partners’ reaction

BEIJING/SHANGHAI China’s central bank is willing to let the yuan fall to 6.8 per dollar in 2016 to support the economy, which would mean the currency matching last year’s record decline of 4.5 percent, policy sources said.

The yuan is already trading at its lowest level in more than five years, so the central bank will aim to ensure a gradual decline for fear of triggering the sort of capital outflows that shook the economy earlier this year and criticism from trading partners such as the United States, said government economists and advisers involved in regular policy discussions.

Presumptive U.S. Republican Presidential nominee Donald Trump already has China in his sights, saying on Wednesday he would direct his treasury secretary to label China a currency manipulator if elected in November.

A surprise devaluation of the yuan last August sent global markets into a spin on worries the world’s second-biggest economy was in worst shape than Beijing had let on, prompting massive capital outflows as investors sought safe havens overseas.

“The central bank is willing to see yuan depreciation, as long as depreciation expectations are under control,” said a government economist, who requested anonymity due to the sensitivity of the matter.

“The Brexit vote was a big shock. The market volatility may last for some time.”

The yuan has dropped to the new lows following Britain’s vote to leave the European Union and so far the central bank has stood aside from intervening, suggesting it is happy with the currency’s depreciation.

Other emerging market currencies have also fallen, but the yuan is the weakest major Asian currency against the dollar this year.

The yuan CNY=CFXS hovered near 6.64 per dollar on Thursday, just off the 5-1/2-year intraday lows and bringing its fall so far this year to about 2.3 percent.

The PBOC did not respond to a request for comment.


Currency dealers said the strength of the dollar and the weakness in economic growth, which hit a 25-year low in 2015, justified a decline in the yuan.

But investors and trading partners will be wary of any significant decline after August’s devaluation and a sharp decline in the currency over a matter of days in January that analysts said was engineered by the central bank.

In the past decade, China has also faced criticism from Western lawmakers who say it held back the appreciation of the yuan.

Earlier this month, U.S. Treasury Secretary Jack Lew said it would be “problematic” if the yuan only went down over time and Trump has said he would take a hard line on trade disputes with China if elected.

Labelling China a currency manipulator “should’ve been done a long time ago,” he said on Wednesday.

China’s premier, Li Keqiang, has repeatedly said China has no intention to stimulate exports via a competitive currency devaluation. The Foreign Ministry said on Wednesday the exchange rate was not the reason for unbalanced trade with the United States, which runs a goods and services trade deficit with China.

However, the sources acknowledged the diplomatic risks of a steep fall in the yuan.

“The pressure from the United States could rise if China allows sharp depreciation,” said a government source.

China has the biggest global exports market share of any country since the United States in 1968, so the yuan’s exchange rate acts as a bellwether for other exporting countries and is a cause of concern for some.

“We are concerned at how quickly the yuan is falling and in turn how the won seems to be tracking its movements,” said a finance ministry official in South Korea, a major exporter that competes with China in textiles, electronics and petrochemicals among other sectors.

However, a person familiar with Japan’s currency diplomacy, was less concerned, saying the yuan’s decline didn’t seem out of line considering the dollar’s strength.

“I don’t think Japan has much to complain about,” this official said. Although Japan rivals China in exports including electronics and heavy machinery Tokyo is struggling with its own currency dilemma of how to contain a sharp rise in the yen following the Brexit vote last week.


“We should gradually let market forces play a bigger role. The market believes that the yuan is under pressure, so our foreign exchange policy should follow this trend,” said a researcher with the Commerce Ministry.

“China needs to safeguard its economic growth and trade but also make sure we don’t create competitive devaluation.”

Julian Evans-Pritchard, China economist at Capital Economics, said in a note that a sharp fall “could set off a renewed bout of fears over renminbi depreciation and a pick-up in capital outflows.” The yuan is also known as the renminbi.

But he said the central bank would want to avoid “panic” so was likely to intervene to stabilize the currency if need be.

The PBOC has been trying to reform the way it manages the yuan by making it more market-driven and transparent, apparently having leant lessons from policy missteps in the past, including the criticism of its August devaluation.

The PBOC sets the yuan’s daily mid-point versus the dollar based on the previous day’s closing price, taking into account changes in major currencies, analysts and officials said.

This year, the PBOC has been guiding the yuan lower by pegging the yuan to the dollar when the U.S. currency weakens and pegging the yuan to a basket of currencies when the dollar rises, they said.

The currency regime gives the central bank more room to allow two-way swings in the yuan versus the dollar, deterring one-way bets on the currency.

The CFETS RMB Index, a trade-weighted exchange rate index that was unveiled by the central bank in December, fell 5.6 pct between the end of 2015 and June 24 of this year, although the central bank has pledged to keep the yuan basically stable against the basket.

(Reporting by Kevin Yao in BEIJING; Nate Taplin and Lu Jianxin in SHANGHAI; Leika Kihara in TOKYO and Christine Kim in SEOUL; Editing by Neil Fullick.)

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Google buys 12-year output from Norwegian wind power farm

OSLO Google has bought the entire 12-year power production from a yet-to-be-built Norwegian wind power farm to supply its European data centers with renewable energy, its developers said on Thursday.

Norway’s Zephyr and Norsk Vind Energi said the 160-megawatt capacity onshore Tellenes wind power farm south of Stavanger is expected to be fully operational in late 2017, and when built it would become the largest wind power farm in the Nordic country.

“Google has been carbon-neutral since 2007 and we are committed to powering 100 percent of our operations with renewable energy sources,” said Marc Oman, EU Energy Lead, Google Global Infrastructure.

“Today’s announcement, Google’s first wind power deal in Norway and the largest to date in Europe, is an important step towards that commitment,” he added.

Funds managed by BlackRock (BLK.N), the world’s largest asset manager, will provide equity financing for the project, the developers said in a statement.

The value of the deal was not disclosed.

(Reporting by Nerijus Adomaitis, editing by Terje Solsvik)

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Netflix says firm continues to look into entering China

SEOUL Netflix Inc (NFLX.O) will continue to look into the possibility of entering China, a senior company executive said on Thursday, as the video streaming service seeks to grow its subscriber base outside its home of the United States.

“Since China is a great opportunity, we continue to look into China,” Ted Sarandos, Netflix’s chief content officer, said at a media event in Seoul without elaborating.

Netflix is trying to counter slowing growth in the U.S. with its move in January to launch in more than 130 new markets worldwide. But the streaming service remains absent in the world’s most populous country, where content providers face stringent regulations and censorship challenges.

The company has also struggled to make headway in other large Asian markets such as South Korea and Indonesia due to a dearth of local content and regulatory hurdles.

Netflix in April forecast U.S. and international subscription growth for the second quarter that was weaker than analyst estimates, underscoring its need to expand.

“The weakest point for Netflix, people say, is the local content, but that’s because we need time to learn not just the market and box office but about what and how Korean people watch,” Sarandos told reporters in response to a question about the firm’s strategy in South Korea.

Netflix is looking at various investment opportunities in Asia to improve its offerings, he said without elaborating.

(Corrects headline and attribution in 1st and 2nd paragraphs to Netflix chief content officer Ted Sarandos, not CEO Reed Hastings)

(Reporting by Nataly Pak; Writing by Se Young Lee; Editing by Christopher Cushing)

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Oil falls on improving supply outlook, economic worries

SINGAPORE Oil prices fell on Thursday as the prospects for supply improved while the economic outlook darkened, but analysts said they still expect prices to rise in the second half of the year.

Brent crude futures LCOc1 were trading at $50.19 per barrel at 0655 GMT, down 42 cents, or 0.83 percent, from their last settlement. U.S. crude CLc1 was down 37 cents, or 0.74 percent, at $49.51 a barrel.

The lower prices were a result of a higher supply outlook as well as concern over a slowing economy, compounded by Britain’s vote to leave the European Union.

“With a ceasefire in Nigeria and Canadian wildfires (receding) oil prices may come under pressure,” ANZ bank said.

“The vote to exit adds further to uncertainty in the global


In Asia’s No.2 economy, Japan, industrial output slid in May at the fastest rate in three months to its lowest level since June 2013, in the latest sign that Asian growth is stalling.

On the supply side, fears of sharp production cuts from a looming strike by Norway’s oil sector eased as output from the North Sea’s biggest producer would only fall by about 7 percent in case of a walk-out, according to Norway’s Petroleum Directorate.

In Nigeria, output has recovered by 200,000-300,000 barrels per day (bpd) since mid-June after attacks on oil infrastructure knocked out some 600,000 barrels of daily oil production to around 1.25 million bpd, down from 2 million bpd at the beginning of the year.

“The government (is) optimistically aiming for a return to normal production by end-July,” Goldman Sachs said.


But with markets overall tightening this year, Brent has risen by over a third since the beginning of January, and by around 25 percent in the second quarter. U.S. crude prices are also up by more than a third this year.

Analysts said oil prices would rise in the second half of 2016, which kicks off on Friday, as supply and demand fall into balance, ending a glut that pulled prices down by 70 percent between 2014 and early-2016.

“Crude oil prices… will likely rise higher toward marginal cost, as decline rates and field shut-ins cause a larger-than-expected supply deficit by year-end,” said analysts at AB Bernstein, adding they expected prices to rise to $60-$70 per barrel.

U.S. crude stockpiles fell 4.1 million barrels in the week to June 24, the sixth consecutive week of drawdowns, to 526.6 million barrels, according to the U.S. Energy Information Administration.

U.S. crude production was at 8.62 million bpd, down from a peak of over 9.6 million bpd last year.

(Editing by Joseph Radford)

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Japan regulator approves Canon deal to buy Toshiba unit, warns on method

TOKYO Japan’s anti-monopoly regulator has approved Canon Inc’s (7751.T) acquisition of Toshiba Corp’s (6502.T) medical equipment unit, but issued a warning over the way they carried out the deal, which antitrust experts have called questionable.

Toshiba, hurt by an accounting scandal and in a hurry to raise cash before closing its books for the business year that ended in March, structured the 665.5 billion yen ($6.5 billion) sale in an unorthodox way so that it could book proceeds before securing approval from regulators.

Some antitrust and accounting experts at the time said the method, involving the use of a special entity and the issuance of warrants to allow Toshiba to receive cash from Canon before regulatory approval, was problematic though not illegal.

The Fair Trade Commission (FTC) said on Thursday the method may be in violation of antitrust laws. However it did not issue any fine and approved the deal anyway.

“Canon thought the deal would be approved without problem if they used this method,” FTC official Takeshi Shinagawa told reporters. “This method should not be repeated by any companies and if they do in the future, they could get a red light.”

The FTC typically does not make public any warnings issued to companies over the merger process, he said.

“We have made this particular warning public to show how serious we look at this method,” said Shinagawa.

He said the FTC approved the acquisition because it would not hurt fair competition in the medical equipment markets in Japan.

Canon declined to comment. A Toshiba spokesman said the company takes the warning seriously and will comply with rules for the notification of mergers set by the FTC.

(Writing by Ritsuko Ando; Editing by Chang-Ran Kim and Edwina Gibbs)

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BMW, Intel, Mobileye team up to develop autonomous cars: source

FRANKFURT BMW (BMWG.DE) is close to unveiling a development partnership for autonomous cars with Israeli collision detection software maker Mobileye (MBLY.N) and U.S. chip maker Intel (INTC.O), a source familiar with the matter said on Thursday.

(Reporting by Edward Taylor; Editing by Georgina Prodhan)

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Santander, Deutsche Bank: U.S. stress test repeat offenders

New York U.S. units of Deutsche Bank DBKGN.DE and Santander (SAN.MC) suffered the ignominy of failing U.S. stress tests yet again this year, less than a week after Britain’s shocking vote to leave the European Union sent their investors running for cover.

Santander’s U.S. bank is the first to fail the test three years in a row.

Both banks failed because of poor risk management and financial planning, not for lack of capital, the Fed said.

Santander’s Chairman Ana Botin vowed in January to fix it within two years, after which she would consider selling it.

Yet any disposal will be tough while the Fed’s standards are unmet, meaning Santander cannot access the capital to invest in its bigger businesses in Spain, Brazil and Britain. And it cannot even draw a dividend from the unit in the meantime because of Fed stipulations.

Santander’s U.S. unit operates a retail and commercial bank with 670 branches and 9,800 employees in the northeast part of the country. It also owns nearly 60 percent of publicly traded lender Santander Consumer USA Holdings Inc (SC.N).

Santander said it is fixing the problems and is already preparing for next year’s test when it expects the Fed to take a better view of the quality of its management.

“We are well on our way to making the enhancements necessary to improve our qualitative assessment,” Scott Powell, the chief executive of Santander Holdings USA, said in a statement.

The Fed faulted Santander for, among other things, not using “reasonable or appropriate” assumptions and analysis in its capital planning.

But the Fed also said Santander has made “progress in improving certain approaches to loss and revenue projection.” And, a senior Fed official said bank supervisors “have noticed a difference” in the resources that Santander has committed to correct the problems.

Santander hired Powell, a former JPMorgan banker, last year and is investing about $170 million a year to reorganize a complex structure, partly a hangover from the acquisition of Sovereign Bank in 2009. Powell is one of more than half a dozen executives hired in the past 18 months to fix the bank.

The Deutsche Bank unit that failed, Deutsche Bank Trust Corp, is one of a handful of entities the company has in the U.S. and holds transaction banking and wealth management business.

The unit is being consolidated into a holding company, DB USA Corp, on July 1 as part of new rules that require large overseas lenders to organize themselves as holding companies in the United States. Deutsche Bank Trust Corporation had not asked for permission to return capital to its parent, a bank spokesman said.

The Fed said the Deutsche unit showed “some improvements in certain aspects of capital planning,” but that “the firm overall continues to have material unresolved supervisory issues that critically undermine its capital planning process.”

The trouble the two banks are having passing the tests come amid other problems.

Santander’s capital ratio is lower than many of its large European peers, though it had reported an improvement in April and forecast that its tier 1 capital ratio under the strictest criteria would rise above 11 pct by 2018.

But since that forecast, Santander’s large UK business was hit by that country’s decision to leave the European Union and the resulting fall in sterling. Santander shares have dropped 18 percent since the vote and are down 24 percent so far this year.

The economic malaise facing Brazil has also cast a cloud over Santander’s Latin American operations. Brazil is battling its deepest recession in decades.

Deutsche Bank, which has trailed its rivals in bouncing back from the 2008 financial crisis, is in the midst of a strategic overhaul.

Germany’s largest lender, Deutsche has a large investment banking operation in London. Like rivals it faces the risk of a loss in revenue should Britain’s exit from the EU deter companies in Europe from buying assets and issuing debt and equity.

Deutsche may also have to spend and disrupt staff to shift some operations out of the UK if Britain loses the right to sell financial services seamlessly across Europe.

Shares of Deutsche have dropped 19 percent since the UK vote and are down 44 percent since the start of the year.

(Editing by Bernard Orr)

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