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Oil craters, set to retest lows

Oil prices have now broken below many Wall Street targets and look set to test the year’s lows and beyond, before finding a bottom.

Led by international bench mark Brent crude, futures were slammed Monday on concerns about new supply coming on the market and worries about contracting demand from China.

“The sentiment is bearish. Technicals are bearish. There’s a lot of downward momentum,” said Michael Wittner, head of commodities research Americas at Societe Generale. “There are a lot of bearish nonfundamentals and fundamentals out there. I’ve got to think these things are close to being priced in. I know it’s ugly out there right now, but I’m not buying that this is a full collapse. … It looks like the market wants to retest the lows from the first quarter. It could happen. Obviously, we’re not that far away from that.”

Brent slipped below the psychologically key $50 per barrel level, opening the door for a retest of its 2015 low of $45.19 from January. Brent finished the day at $49.83 per barrel, and is now down 13 percent for the year. Its more than 4.5 percent drop Monday outpaced the 3.6 percent decline in West Texas Intermediate oil futures. WTI fell to $45.17 per barrel, just several dollars above its year low near $42.

Read MoreTempted to buy oil stocks?

“We are of the view we’re not really going to be staying down here for a prolonged period of time. We see this still as a seasonal lull in the market.” said Sabine Schels, head of fundamental commodities research at Bank of America Merrill Lynch. Schels said her end-of-quarter target is $50 for Brent and $45 for WTI, and the market could undershoot that.

Schels said market positioning will add downside pressure. “We’ve seen hedge funds reducing their bullish bets on WTI—the lowest in five years. The gross short position is almost back to what we had earlier in the year,” she said, adding it would add pressure to the downside for oil prices.

Michael Cohen of Barclays said he has a third-quarter average target of $61 per barrel for Brent and $55 per barrel for WTI.

Read MoreBattered oil giant has difficult future

“The technical indicators are such that we could see a $1 or $2 move lower … I think it’s unlikely you stay at these levels,” he said. Lower prices bring more buying, such as China’s stocking of its strategic petroleum reserve, he noted.

Oil prices were pressured by comments from Iran‘s energy minister who said the country could raise output by 500,000 barrels per day as soon as sanctions are lifted and by a million barrels within months. The market was also reacting to high levels of production from OPECcountries. Reuters reported last week that its survey showed the cartel was at the highest monthly production level in history in July.

Analysts were skeptical of the claim by Iran, but OPEC’s lack of willingness to set prices has created a new dynamic in the market, said Cohen.

“Whether the Saudis like it or not, they introduced a more volatile market environment rather than a price target,” he said. Increases in production by Saudi Arabia and Iraq have added to a global oversupply of 1.5 million to 2 million barrels a day.

“We see no real upside for the next couple of weeks, until the end of September. And then going into the fourth quarter, we’ll see a lot more demand coming back into the market,:Schels said,

She said Iraq and Saudi Arabia are factors. “Both of them are producing record highs and there doesn’t seem to be any let up. Rigs in Saudi Arabia are at a record high,” Schels said. “We see continued increases out of Saudi really for market share gains and in Iraq, there’s more infrastructure that’s coming on line that had previously discontinued production,” she said. Between them, another 500,000 barrels a day could be added next year.

There are also factors that could start to be positives for oil, including the first big monthly drop in crude output from U.S. shale producers in May, she said.

Schels said the shale producers will also have to pass muster as borrowers when lenders perform a borrowing base re-determination this fall. “We do know the regulators applied a lot more scrutiny on oil and gas lending,” she said. Schels said she does expect to see cutbacks in funding for some companies in the oil patch, and therefore crude output could drop, a positive for prices.

“We do think the market is underestimating how much shale production will come off on the back of all these facts. We actually have a decline in shale production for all of next year,” she said.

The U.S. industry produced 9.4 million barrels a day of oil in the week ended July 24, well off the July high of 9.6 million barrels.

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Trade deal negotiation in Pacific stumbles

LAHAINA, Hawaii — Trade negotiators from the United States and 11 other Pacific nations failed to reach final agreement on Friday, with difficult talks on the largest regional trade agreement ever deadlocking over protections for drug companies and access to agriculture markets on both sides of the Pacific.

Trade ministers, in a joint statement, said late Friday they had made ”significant progress” and will return to their home countries to obtain high-level signoffs for a small number of final sticking points on the agreement, the Trans-Pacific Partnership, with bilateral talks reconvening soon.

”There are an enormous number of issues that one works through at these talks, narrowing differences, finding landing zones,” said Michael B. Froman, the United States trade representative. ”I am very impressed with the work that has been done. I am gratified by the progress that has been made.”

Still, the breakdown is a setback for the Obama administration, which had promoted the talks here as the final round ahead of an accord that would bind 40 percent of the world’s economy under a new set of rules for commerce.

Read MoreWinners, losers in world’s biggest trade deal

President Obama’s trade push had been buoyed by Congress’s narrow passage in June of so-called fast track trade negotiating powers, and American negotiators had hoped other countries could come together once Congress had given up the right to amend any final agreement.

In the end, a deal filled with 21st-century policies on Internet access, advanced pharmaceuticals and trade in clean energy foundered on issues that have bedeviled international trade for decades: access to dairy markets in Canada, sugar markets in the United States and rice markets in Japan.

”No, we will not be pushed out of this agreement,” said a defiant New Zealand trade minister, Tim Groser, who held out for better access for his country, the largest exporter of dairy in the world.

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Australia, Chile and New Zealand also continue to resist the push by the United States to protect the intellectual property of major pharmaceutical companies for as long as 12 years, shielding them from generic competition as they recoup the cost of developing next-generation biologic medicines.

”There’s always been more than one issue,” said Representative Sander Levin, Democrat of Michigan, who is here as an observer.

The trade ministers who gathered at the luxury hotels of Maui this week for talks that went deep into the night did have some successes. They reached agreement on broad environmental protections for some of the most sensitive, diverse and threatened ecosystems on Earth, closing one of the most contentious chapters of the Pacific accord.

They also reached agreement on how to label exports with distinct ”geographic indications,” such as whether sparkling wine can be called champagne. And they agreed on a code of conduct and rules against conflicts of interest for arbitrators who would serve on extrajudicial tribunals to hear complaints from companies about whether their investments were unfairly damaged by government actions.

But the failure to complete the deal — eight years in the making — means the next round of negotiations will push the United States ratification fight into 2016, a presidential election year. Most Republican candidates are very likely to back it, but a final agreement would force the Democratic front-runner Hillary Rodham Clinton to declare her position, which she has avoided.

This week, she told reporters, ”I did not work on T.P.P.” as secretary of state, although she gave a 2012 speech in Australia declaring the accord ”the gold standard in trade agreements.”

The push for the Pacific deal has already split most Democrats from their president. Further delay raises the prospect that a deal sealed by President Obama might have to be ratified by his successor, just as George H. W. Bush’s North American Free Trade Agreement was secured by Bill Clinton.

The failure of the Maui talks pointed to the extreme difficulty of reaching agreement with so many countries, each with its own political dynamics. Vietnam, Malaysia and New Zealand were willing to make significant concessions to gain access to United States markets.

But with Canada’s prime minister, Stephen Harper, fighting for his political life ahead of national elections in October, Canada would not budge on opening its poultry and dairy markets.

Chile, with a new, left-of-center government and existing free trade agreements with each of the countries in the Pacific deal, including the United States, saw no reason to compromise, especially on its demand for a short window of protection for United States pharmaceutical giants.

Australia’s delegation insisted that pharmaceutical market protections beyond five years would never get through Parliament, and the United States team was demanding 12.

Ildefonso Guajardo, Mexico’s secretary of economy, was defiant on the hard line he took against the export of Japanese cars with any less than 65 percent of their parts from T.P.P. countries. ”I am fighting for the interests of my country,” he said.

The bright spot might have been the environmental negotiations. The completed environmental chapter would cover illegal wildlife trafficking, forestry management, overfishing and marine protection, and it could prove to be a landmark, setting a new floor for all future multilateral accords.

”As centers of biodiversity, T.P.P. countries cover environmentally sensitive regions from tundra to island ecosystems, and from the world’s largest coral reefs to its largest rain forest,” reads a summary of the environment chapter, obtained by The New York Times. ”T.P.P.’s Environment chapter addresses these challenges in detail.”

Under the agreement, the 12 countries — from Peru and its rain forest to Vietnam and the diverse Mekong Delta — must commit to obeying existing wildlife trafficking treaties and their own environmental laws. Environmentally destructive subsidies, such as cheap fuel to power illegal fishing vessels and governmental assistance for boat making in overfished waters, are banned.

The chapter singles out the ”long-term conservation of species at risk,” such as sea turtles, sea birds and marine mammals and ”iconic marine species such as whales and sharks.”

Failure to comply would subject a signatory to the same government-to-government compliance procedures as any other issue covered by the trade agreement, potentially culminating in trade sanctions. United States negotiators hope that just the threat of economic sanctions will bolster relatively weak environmental ministries in countries like Peru, Malaysia and Vietnam.

Some environmental groups, and many Democrats in Congress, are very likely to be dissatisfied. They complain that agreeing to a series of ”obligations” falls short of ”requirements.” The Sierra Club has complained that the United States has not pursued trade remedies against countries obliged to environmental enforcement under existing accords, such as the United States-Peru free trade deal.

But most major environmental groups remained circumspect, or cautiously optimistic, until they could read the details.

”Negotiators have accomplished much, but the hard work is far from over,” said David McCauley, senior vice president for policy at the World Wildlife Fund. ”Individual nations now must live up to their T.P.P. conservation obligations, including putting in place effective measures to ensure that they are responsible traders in wildlife and products provided by our forests and oceans.”

The impact of the Pacific accord’s environmental chapter could be broad, both for the nations in the deal and those outside. The 12 participating countries account for more than a quarter of the global seafood trade and about a quarter of the world’s timber and pulp production. Five of the countries rank among the world’s most biologically diverse countries.

Some, like Vietnam and Malaysia, have long been on the watch list for illegal wildlife trafficking, such as the illicit trade in rhino horns. Japan has long been scrutinized for its treatment of whales and dolphins. The World Bank has estimated that as much as 80 percent of Peru’s logging exports are harvested illegally.

Under the terms of the new accord, member countries would be required to strengthen port inspections and document checks, a provision that could expand the scope of the deal beyond the 12 countries. Illegal wildlife and timber harvests bound for countries like China go through ports of the 12 countries. And countries in the deal are required to take action if they discover contraband that has been harvested illegally, even if the product is not illegal in their country.

Negotiators say they substantially narrowed the number of outstanding issues. They vowed to keep the momentum going. But, as one non-United States official said, if talks go into hiatus for long, it could be easier for many of the countries to say no than yes.

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China stock regulator restricts 24 trading accounts for suspected irregularities

China’s securities regulator said on Friday that it had restricted 24 stock trading accounts for suspected trading irregularities.

The accounts had been found to have abnormal bids for shares or bid cancellations and were thus suspected of affecting share prices or influencing investment decisions by other investors, the China Securities Regulatory Commission said in its official microblog weibo.

The regulator also said that it was investigating individuals and institutional investors who used automated trading strategies in the Shanghai and Shenzhen stock exchanges so as to analyze their impact on the stock market.

Read MoreAsian stocks rise, but commodity slump caps gains

China has taken a slew of steps to rescue its stock market after its 35-percent plunge in less than four weeks since June 12, including clamping down on irregularities.

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SoftBank: Why we changed investment focus

SoftBank is eschewing investments in early-stage firms in favor of mature companies in a strategy shift under the helm of newly-appointed President Nikesh Arora.

“It’s bigger bets in businesses where we believe they are beginning to exhibit trajectory, potential to break out and become a leader in their space,” the 47-year old company president told on Friday. “We go invest in them, take a reasonable stake, 25-30 percent, and support them for the rest of their lives.”

The new strategy comes after the announcement earlier this month that venture capital arm SoftBank Capital would be wound down. That means all future investments will now originate from parent firm SoftBank.

Read MoreSoftBank taps former Google exec as new president

Arora, speaking on the sidelines of a tech conference in Hong Kong, pointed to overheated interest in early-stage startups as the reason for stepping back from those investments.

“It’s the best time to be an entrepreneur. Capital is aplenty, there’re lots of people looking to invest in companies; the market is pricing risk very low. You have a huge amount of unicorns or deckacorns out there where people are giving them a lot of money expecting management to execute and execution risk is even priced to zero,” he said.

He notes there are likely half a million to a million companies looking for funding around the world.

“So, from our perspective becoming an investor in this market is tough.”

SoftBank, a Japan-based investment holding company, boasts a market capitalization of $67 billion thanks to lucrative returns on investments, such as a $20 million stake in Alibaba purchased in 2000. Its latest investments include $20 million into ad-analytics platform Cinarra Systems and reportedly more than $76 million into U.S. online lender Social Finance, according to the Wall Street Journal.

But that’s not to say smaller deals are entirely out of the picture.

“There’s an old adage that exceptions make the rules. There will always be one or two companies that we find really exciting and say ‘why not get involved.’ But that’s not what we will normally be looking for,” he said.

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Global financial markets a shell game: Bill Gross

The global financial markets are a “shell game” thanks to government interventions like quantitative easing, and once the manipulation stops, the markets may drop, bond legend Bill Gross said Wednesday.

“This shell game has been taking place for a long time,” the manager of the Janus Global Unconstrained Bond Fund said in an interview with  “Power Lunch.”

He believes it’s evidenced by what’s happening in the Chinese stock market, with margins being changed and stocks being delisted.

“We see the same thing, basically, in all central banks in terms of their interest rates, in terms of quantitative easing from the ECB.”

Gross first tweeted about it Wednesday morning.

“There’s no doubt that the ‘p,’ in this case the price of assets, I suppose, is sort of a question mark, and ultimately when central banks stop manipulating markets, where that ‘p’ goes, I think, is up for grabs and probably the arrow points downward,” Gross told.

His comments came shortly after the Federal Reserve said it was leaving interest rates unchanged. The central bank has kept its federal funds rate near zero since December 2008.

Read MoreFed leaves interest rates unchanged

However, just because the markets are a “shell game” doesn’t mean there isn’t opportunity, Gross said. Instead of taking risk positions in terms of high-yield spreads or interest rates in long bonds or currency, investors can move in the opposite direction, like owning the yen instead of the dollar or the peso instead of the euro, he explained.

“There are choices and there are interest rates and prices that are relatively high and some relatively low. So that’s the opportunity,” he said.

Meanwhile, while Gross still believes the Chinese market may be a great short, he thinks the market is a difficult one to play.

Read MoreChina stock crash will hit economy: Credit Suisse

He would look to move in currency markets and against high-yield markets.

“You take advantage of the increase in risk atmosphere that a declining Chinese stock market portrays. So it’s not necessary to short the Chinese stock market. As a matter of fact, it’s very dangerous.”

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Postcards from China: What US investors can learn

Think about the Chinese economy and stock market as basically being a fun-house mirror view of its American counterparts.

Debt-driven economy? Check. Central bank and government stimulus aimed at goosing the stock market? Check. Highly leverage-driven growth in that stock market? Check.

True, China and the U.S. have key differences. China’s gross domestic product gains have dwarfed what’s happened in America. Equity values represent a much higher proportion of U.S. wealth. And, of course, domestic stocks are not in free fall like they are in China.

Yet, consider this kernel of China analysis recently published by Citigroup’s economic team:

While China’s data suggests growth stabilization, policymakers’ demonstrated aversion to volatility across many assets could propagate moral hazard, delay price adjustment, lead to prolonged resource misallocation and build-up of future risks.

Substitute “U.S.” for “China” in that sentence and the analysis still applies pretty well.

In fact, when critiquing the Federal Reserve‘s response to the financial crisis in 2008, many economists cite those very potential pitfalls: Asset misallocation due to focus on liquidity and stock market gains; the moral hazard that comes from an overreliance on policy stimulus; and problems with price discovery due to the effects unnaturally low interest rates have had on the post-crisis corporate earnings cycle.

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Minefield for market with Fed, earnings, commodities crush

The Fed meets in the week ahead, but a commodities meltdown and the mixed earnings season are adding to concerns about global growth and may steal some of its thunder.

The Federal Open Market Committee is expected to discuss the path to normalizing interest rates during its two-day meeting, but is not expected to make major changes or even suggest when it might raise rates when it releases its statement Wednesday afternoon.

Instead, traders expect to glean more information about the Fed’s intentions from economic reports, like the first look at second-quarterGDP, expected Thursday, the employment cost index Friday or the July employment report the following week.

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