The world economy

Wall Street drops as anxious investors eye China

Reuters,

28 September, 2015

U.S. stocks finished sharply lower on Monday and were on track for their worst quarter in four years as investors worried about the health of China's economy and its potential impact on the timing of a U.S. interest rate increase.

The Nasdaq composite .IXIC lost 3 percent and S&P 500 .SPX dropped more than 2 percent.

Much of the damage came from pharmaceutical and biotech stocks after Democratic lawmakers on Monday attacked "massive" price increases of two heart drugs from Canada's Valeant Pharmaceuticals International Inc(VRX.TO), which tumbled 16.5 percent.

The Nasdaq biotechnology index .NBI fell 6 percent, its worst one-day drop since 2011, adding to losses from last week when Democratic presidential candidate Hillary Clinton criticized drug pricing.

Among the S&P sectors, the health care index .SPXHC was the deepest decliner, down 3.84 percent.

"The broad healthcare sector and China are hurting the market. It's time for risk-off and there's no place to hide," said Richard Weeks, managing director at HighTower Advisors in Vienna, Virginia.

Profits at Chinese industrial companies fell 8.8 percent, fresh data showed, pushing down shares of raw material producers and energy companies. Oil prices fell more than 2 percent.

U.S. consumer spending rose more than expected in August, according to another report, appearing to add to the case for an interest rate increase this year.

But contracts to buy previously owned U.S. homes decreased, indicating the robust housing market could be losing some steam.

The Federal Reserve held off from raising rates at its September meeting, citing concerns about the global economy, notably China, among other factors.

New York Federal Reserve President William Dudley on Monday suggested the central bank could pull the trigger as soon as October.

"A lot of investors think the Fed is confused," said Mohannad Aama, Managing Director at Beam Capital Management LLC. "They're putting themselves in a corner by saying they expect to raise rates between now and the end of the year when the economy every day is proving otherwise."

Several other Fed officials are scheduled to speak during the week, including Chair Janet Yellen on Wednesday.

Investors will also scrutinize September non-farm payrolls data on Friday.

The Dow Jones industrial average .DJI fell 1.92 percent to end at 16,001.89 points.

The S&P 500 .SPX lost 2.57 percent to 1,881.77 and the Nasdaq Composite .IXIC dropped 3.04 percent to finish at 4,543.97.

Billionaire investor Carl Icahn said the Fed's low interest rates are creating bubbles in markets for art, property and "junk" bonds, in a video to be released on Tuesday. watch.reuters.tv/HBv

Alcoa's (AA.N) shares jumped 5.73 percent after the aluminum producer said it would split into two publicly-traded companies.

The largest drag on the S&P 500, Apple (AAPL.O) fell 1.97 percent despite reporting that it sold a record number of its new iPhones in their first weekend.

Declining issues outnumbered advancing ones on the NYSE by 2,796 to 316. On the Nasdaq, 2,397 issues fell and 452 advanced.

The S&P 500 index showed no new 52-week highs and 80 lows, while the Nasdaq recorded 12 new highs and 358 lows.

About 8.3 billion shares changed hands on U.S. exchanges, above the 7.2 billion daily average for the past 20 trading days, according to Thomson Reuters data.

Kingdom in Crisis: Saudi Arabia Pulls up to $70 Billion from Global Markets

Saudi Arabia pulled as much as $70 billion from global markets as it tries to cut its budget deficit after a sustained slump in oil prices and the country's ongoing offensive in Yemen, according to financial services market intelligence company Insight Discovery

Sputnik,

28 September, 2015

"Fund managers we've spoken to estimate SAMA [Saudi Arabian Monetary Agency] has pulled out between $50 billion to $70 billion from global asset managers over the past six months," Nigel Sillitoe, chief executive officer of the Dubai-based firm, told Bloomberg.

"Saudi Arabia is withdrawing funds because it's trying to cut its widening deficit and it's financing the war in Yemen," he said.

As oil prices halved over the past year, SAMA's foreign reserves have fallen about 10% from a peak of $737 billion in August 2014 to $661 billion in July. The government has turned to bond sales to help sustain spending and fund its military campaign in Yemen.

"Foreign-exchange reserve depletion, rather than accumulation, is the new reality for Saudi Arabia," Jason Tuvey, Middle East economist at Capital Economics, said in an email to Bloomberg.

"None of this should come as much surprise," given the current-account deficit and risk of capital flight, he added.

Saudi's deep foreign reserves could sustain the country for years, but analysts say using them to avoid cost cutting could threaten its credit rating, Bloomberg reported. The government has offered few specifics about how it will cut spending, but it reportedly is considering measures long considered forbidden or unnecessary, including alternative energy.

"NATO and the United States should change their policy because the time when they dictate their conditions to the world has passed," Ahmadinejad said in a speech in Dushanbe, capital of the Central Asian republic of Tajikistan

Why Shell Quit Drilling in the Arctic

After spending $7 billion on a single well ... what?

Bloomberg,

29 September, 2015

Royal Dutch Shell's abrupt announcement today that it would cease all offshore drilling in the Arctic is surprising for several reasons. One is the unusual degree of confidence the company expressed as recently as mid-August that it had identified 15 billion barrels of oil beneath the well known as Burger J it's now abandoning.

What on earth happened?

Mistaken geology

After spending $7 billion over several years to explore a single well this summer, Shell said in a statement that it "found indications of oil and gas … but these are not sufficient to warrant further exploration." This contrasts sharply with Shell officials' statements as recently as July and August that based on 3D and 4D seismic analysis of core samples, its petroleum geologists were "very confident" drillers would find plentiful oil.

The geologists' expectations were the main reason Shell spent all that money on a project that entailed much-higher-than-average operational risks and international environmental condemnation. Giving up has got to hurt at a company that prides itself on scientific and technical prowess. Shell said it would take an unspecified financial charge related to the folding of its Arctic operation, which carries a value of $3 billion on the company's balance sheet.

Intensifying fear about oil prices

In late July, when Ann Pickard, Shell's top executive for the Arctic, explained the economics of drilling in the Chukchi Sea, she readily acknowledged that if oil prices remained below $50 a barrel, the off-shore adventure would be for naught. At $70, Chukchi oil would be "competitive," she told Bloomberg Businessweek, and at $110—a reasonable projection, according to the company's economists—it would be a huge winner. She was talking about prospective prices 15 years from now.

Well, in recent weeks, Shell appears to have lost some of its bravado about where prices will be in 2030—according to a person familiar with the company's thinking. Otherwise, it wouldn't have given up altogether on the Chukchi, where it continues to hold 275 Outer Continental lease blocks. Indeed, Marvin Odum, director of Shell Upstream Americas, said in the written statement that the company "continues to see important exploration potential in the basin, and the area is likely to ultimately be of strategic importance to Alaska and the U.S."

Shell lost confidence it could make a profit any time in the foreseeable future on the oil that's there. Low oil prices have also necessitated a companywide cost-cutting push; shutting down in the Arctic will help Shell trim expenditures, especially next year. (Pickard, who is expected to retire, was not available for an interview, according to a Shell spokesman.)

Regulatory restrictions

The Obama administration took a lot of flak from environmentalists over its decision to allow Shell to move ahead with drilling in the Arctic. Former Vice President Al Gore, for one, called the White House position "insane." In the end, an array of partial restrictions the administration imposed on Shell helped push the company to pull up its drill bit and head south. Wildlife officials concerned about noise-sensitive walruses, for example, vetoed Shell's original plan to drill two wells simultaneously. "That caught us by surprise," Pickard conceded in July.

Shell actually could have turned to the second well this month, but it decided instead to cut its losses. In its statement today, Shell said: "This decision reflects both the Burger J well result, the high costs associated with the project, and the challenging, unpredictable federal regulatory environment in offshore Alaska."

Environmental pressure ... and fear of Clinton

While green groups failed to stop Shell in the courts, they marshaled an extraordinary campaign ranging from "kayaktivists" who impeded Shell vessels as they departed for the Chukchi to incessant lobbying in Washington.

“We are pleased that Shell has finally come to grips with the reality that drilling in the Arctic makes no sense," Andy Sharpless, chief executive officer of the nonprofit Oceana, said by e-mail. "It’s not economically viable nor is it sensible from an environmental standpoint."

Possibly more significant than the immediate environmental activism is Shell's concern about who will oversee Arctic regulation come January 2017. In August, Hillary Clinton made her first major break with President Obama over the environment, announcing that she opposed Arctic drilling. "Given what we know, it's not worth the risk," Clinton said on Twitter. Despite the candidate's current struggle to shake off primary foe Senator Bernie Sanders, Shell may fear that a Clinton presidency would doom its chancy northern exploration.