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Bloomberg.com —  As Donald Trump’s trade policy risks worsening economic conflict with the European Union, Russia’s Vladimir Putin is strengthening ties with the region.

Putin will mark 50 years of gas exports to Europe at an event in Vienna on Tuesday. A controversial 9.5 billion-euro ($11 billion) pipeline to feed more supplies from Siberia directly into Germany is progressing despite a U.S. sanctions threat. And Moscow-based Gazprom PJSC last month settled a seven-year-old pricing dispute with the European Union, enabling it to expand its market share.

Russia’s success in tightening its grip on Europe’s fuel supply contrasts with friction in the trans-Atlantic relationship, after the U.S. president’s decision to pull out of the Iran nuclear deal and slap tariffs on steel imports. Those moves have left the European partners in the new Russian pipeline wondering whether they can get around any sanctions that Trump deploys.

“Trump is forcing the Europeans closer to the Russians,” Stefan Meister, Russia expert at the German Council on Foreign Relations in Berlin, said in an interview. “This is playing right into Putin’s hands.”

U.S. officials also are making the rounds in Europe, with less impact. State Department envoys have appeared in Berlin, Copenhagen and Brussels in recent weeks warning that the Gazprom-sponsored Nord Stream 2 pipeline will leave Europe too dependent on Russia for its energy supply.

They were spurred into action after Germany and Finland granted construction permits, allowing five boats to begin dredging along the 1,220 kilometer route. This summer, 24-ton sections of steel pipe will be lowered into the sea. Work may be complete by the end of next year, in time for the expiration of Gazprom’s current transport deal with Ukraine’s NJSC Naftogaz in 2020.

The American are threatening sanctions to stop the work. They’re concern is that the new route will allow Russia to bypass the existing transport corridor running through Ukraine, depriving that nation of crucial revenue.

While those views have gained traction mainly in eastern Europe, top EU officials dismiss sanctions as a way of solving problematic issues. At an event in Brussels, European Commission Vice President Maros Sefcovic signaled the EU may protect the companies financing Nord Stream 2. Those include Royal Dutch Shell Plc, BASF SE’s Wintershall unit, Uniper SE, OMV AG and Engie SA.

“I would prefer if we can discuss the issue with the Americans,” Sefcovic said on May 25.

Meanwhile, relations at least on the gas front appear to be warming between Europe and Russia. Gazprom bowed to the EU’s interpretation for how the gas market should work in settling a priceing dispute last month. French President Emmanuel Macron and German Chancellor Angela Merkel joined Putin last month at a forum in St. Petersburg — and echoed some of his concerns about the damaging impact of sanctions and trade tariffs.

Not all European nations agree on the need for another Russian pipeline. Poland, Slovakia and Ukraine, which have for years moved Russian fuel via existing pipelines laid through their territories, object to such a bypass.

Alternative Sources
Europe has few alternatives to taking Russian gas. From the U.K. to Germany and Italy, governments are shutting down coal plants to meet the world’s most ambitious targets for slashing pollution and greenhouse gases. Wind and solar farms are filling some of the gap, but gas is the cleanest fuel to balance the grid on calm days or when the sun doesn’t shine.

Austria’s OMV, which signed a groundbreaking gas deal with the Soviet Union in 1968, called the Russian supplies “reliable.” Looking ahead to Putin’s visit to Vienna, OMV CEO Rainer Seele and Gazprom boss Alexey Miller hinted in a joint statement at “expanding the partnership” and say they “plan to reach a new level of strategic cooperation.”

The American suggestion is that Europe should take U.S. exports of natural gas in its liquid form. That requires expensive technology. And it wouldn’t prevent exports going to Asia where prices are even higher than Europe’s.

Washington’s concern is that Putin has lured Europe into dependence and is using gas as leverage to advance his political agenda.

“For Russia, it’s clear to us that gas is not simply a commodity to be traded — it’s a foreign policy tool and a weapon,” said Adam Shub, an official at the U.S. mission to the EU in Brussels.

It isn’t clear just how far the U.S. would go in holding up Nord Stream 2. Full sanctions against the project’s participants could prevent them from doing business in the U.S., a potentially fatal blow for companies like Shell with major U.S. operations. It could have more tailored moves, like a travel ban for executives, or ratchet up pressure slowly by asking the State Department to draw up a list of measures under consideration.

“Sanctions are a potential lightning bolt in the refinery,” said Richard Nephew, an expert on energy sanctions at the Center on Global Energy Policy at Columbia University in New York. “The companies have been thinking and planning around sanctions risk for a long time. The companies can do a few things to de-fang the U.S.”

Depending on the shape of the sanctions, the sponsoring companies might be able to set up independent legal entities to do the work, circumventing whatever Trump wants to impose, Nephew said. American officials may also lean on Sweden and Denmark to refuse construction permits. With Denmark at least, Nord Stream 2 has a plan to rejig the route and avoid those waters.

Regardless, Russia already supplies more than a third of Europe’s gas, and that portion is growing. It’s the biggest single supplier of the fuel, and Gazprom’s shipments to the continent reached a record last year. They’re on track to rise again in 2018 as a chilly winter drove up heating demand and left the content’s storage tanks depleted.

Russia for its part has always denied it uses gas as a weapon, noting that the fuel kept flowing all through the worst parts of the cold war. For Gazprom’s biggest customer in Europe, Nord Stream 2 is an essential piece in Europe’s energy system and necessary to satisfy increasing demand for gas.

“It’s strategically very important for the European market, for our customers – and we have an obligation to serve our customers reliably with gas,” Klaus Schaefer, chief executive officer of the German utility Uniper SE, said in an interview in St. Petersburg on May 25. “We are very supportive.”

— With assistance by Anna Shiryaevskaya, Brian Parkin, and Boris Groendahl

Bloomberg.com — Three days after being sworn in, Italy’s new populist government is preparing for one final hurdle before it sets about trying to overhaul European Union rules and the established order: a confidence vote in both houses of parliament.

Parliamentary approval will be sought this week for the 18-member cabinet of Prime Minister Giuseppe Conte, a 53-year-old law professor with no political experience. The anti-establishment Five Star Movement and the anti-immigrant League currently hold a majority in both houses, although in the 320-seat senate the two groups only have 14 votes more than the opposition.

(Left to right) Prime Minister Giuseppe Conte speaks with President Sergio Mattarella during the oath of office at the Quirinale Palace in Rome, Italy, on Friday, June 1, 2018. The governmrent was pieced together after weeks of Byzantine wheeler-dealing during which Five Star’s Luigi Di Maio and the anti-immigrant League’s Matteo Salvini managed to mesh their populist programs only to pull the plug on a government at the last minute after the president vetoed their pick of a euroskeptic finance minister. Photographer: Giulio Napolitano/Bloomberg

While this first vote is likely to go smoothly as the parties have already agreed on the list of ministers and government program, some analysts predict difficult times ahead in future parliamentary ballots as the two parties spar over which of their expensive electoral promises to keep first.

“The coalition parties have different constituencies and different requirements from the budget,” which could led to a renewed political crisis in the medium to short term, financier George Soros wrote in an op-ed published in newspaper Corriere della Sera on Sunday. “The government may well fall, so we may be facing elections later this year or more likely early next year.”

On Sunday, Five Star leader Luigi Di Maio said a universal basic income for poorer Italians will be among the first measures he plans to put before the parliament. League’s leader Matteo Salvini, who has promised voters hefty tax cuts, said over the weekend that he plans to cut 5 billion euros ($5.8 billion) worth of assistance to asylum seekers in order to recover funds to keep his electoral pledges.

(Left to right) Luigi Di Maio Vice Prime Minister and Minister for Work and Economic Development and Matteo Salvini, Vice Prime Minister and Minister of Interiors react during the oath of office presided by President Sergio Mattarella at the Quirinale Palace in Rome, Italy, on Friday, June 1, 2018. The government was pieced together after weeks of Byzantine wheeler-dealing during which Five Star’s Luigi Di Maio and the anti-immigrant League’s Matteo Salvini managed to mesh their populist programs only to pull the plug on a government at the last minute after the president vetoed their pick of a euroskeptic finance minister. Photographer: Giulio Napolitano/Bloomberg

Yet the sum is small compared with the implementation of the full Five Star and League program, which also includes scrapping a pension reform that had helped balance Italy’s precarious finances during the economic crisis. Corriere della Sera estimated the cost of the populist program at as much as 100 billion euros. That’s ambitious for Italy, which has the second highest debt burden in Europe after Greece, and one that could put it on a collision course with the euro-zone’s fiscal discipline.

The announcement of the government plan alarmed markets last week and sparked tensions with Italian President Sergio Mattarella, almost scuppering the chance of forming a government. The spread between Italian and German 10-year bonds widened to 290 basis points on May 29 when concerns about the program added to speculation over the possible appointment of 81-year-old euroskeptic economist Paolo Savona as finance minister. The post eventually went to economist Giovanni Tria, 69, calming markets, with Savona being made responsible for European affairs.

“The worst case scenario was avoided, but uncertainty remains,” Kepler Cheuvreux analyst Marco Baccaglio wrote in a note on Friday. A weak majority in the senate might undermine the sustainability of the government and the of cost of the plan “cannot be forgotten.”

— With assistance by Chiara Remondini

Bloomberg.com — Bubbling tensions between the world’s top two economies over tariffs pose no bar to diving into Chinese stocks, unless a full-blown trade conflict breaks out, according to Deutsche Bank AG.

The U.S. is on course to release its final list targeting $50 billion of Chinese imports with tariffs by June 15, with the levies taking effect soon after. And China’s government said on Sunday the tariffs could scuttle progress made so far in talks. Next steps are unclear, following Commerce Secretary Wilbur Ross weekend meetings with negotiators in Beijing.

The rhetoric isn’t troubling Deutsche Bank strategist Will Stephens. The MSCI China Index is one of the most domestically geared gauges globally, with revenue exposure to the U.S. just 2 percent — meaning stocks in the benchmark shouldn’t bear the brunt of trade tensions, according to Deutsche Bank.

“We’ve been relatively sanguine about it,” he said in a telephone interview Wednesday, adding that the volatility would provide entry opportunities to buy stocks in Asia. That view hasn’t changed after statements from the Chinese government during the weekend, he said on Monday. The main risk of impact is to overall sentiment towards markets, he said.

“In a very aggressive trade war, that would have implications for the economy, but that’s not our base case,” the Hong Kong-based Stephens said.

Bloomberg.com — Treasuries extended losses and the dollar added to gains after better-than-forecast jobs data raised concern the Federal Reserve may accelerate its tightening schedule. U.S. stock futures remained higher.

S&P 500 contracts rose 0.4 percent after the unemployment rate held at an 18-year low. The dollar was set to push it weekly streak of gains to seven weeks, the most since 2014, and the 10-year Treasury yield rose above 2.90 percent.

The jobs data underscored that the economy is strong enough to withstand a rate hike when the Federal Reserve meets later this month. Investors remain optimistic that threats of more international tariffs will not materialize into an all-out trade war between the U.S. and its key partners.

In Europe, stocks were set for the largest gain in a month after Italy’s populist parties grabbed power, ending a three-month political gridlock. The latest developments in Spain also removed uncertainty, providing some well-needed relief overseas. The common currency declined.

The risk-on mood prevailed even as U.S. President Donald Trump’s administration pushed ahead with tariffs on imports from its key trading partners. German bunds led a drop in most core European bonds, though Italy’s gained along with those of peripheral European nations. Spanish assets rallied after Prime Minister Mariano Rajoy was ousted by opposition parties, opening the way for Socialist leader Pedro Sanchez to take over. The euro edged lower.

Investors remain optimistic that threats of more international tariffs will not materialize into an all-out trade war between the U.S. and its key partners, while the latest developments in Italy and Spain also removed uncertainty, providing some well-needed relief within Europe. Friday’s U.S. jobs report may show payrolls rising and the unemployment rate holding at the lowest since 2000, bolstering confidence in the Federal Reserve’s policy-tightening path.

West Texas Intermediate crude declined as rising U.S. output overshadowed a surprise drop in stockpiles, with traders also focused on whether Saudi Arabia and Russia will boost production.

Bloomberg.com — U.S. hiring rose more than forecast in May, wages picked up and the unemployment rate matched the lowest in almost five decades, indicating the strong labor market will keep powering economic growth.

Payrolls increased 223,000 following a revised 159,000 gain, Labor Department figures showed Friday. The median estimate of analysts surveyed by Bloomberg called for 190,000 jobs. Average hourly earnings increased 2.7 percent from a year earlier, more than projected, while the jobless rate fell to 3.8 percent from 3.9 percent to match April 2000 as the lowest since 1969.

The report reinforces expectations for Fed policy makers to raise interest rates when they meet June 12-13, and may spur bets on two more hikes this year after that, rather than one. Steady hiring and lower taxes will bolster consumer spending, helping to support the projected rebound in U.S. growth this quarter and continuing to trim the unemployment rate. Wage gains, while positive in the latest report, have yet to show a sustained acceleration.

“The job market is red hot,” Ryan Sweet, an economist at Moody’s Analytics Inc. in West Chester, Pennsylvania, said before the report. Still, “it’s only going to get harder to find workers. We’ll see trend job growth begin to cool.”

President Donald Trump tweeted an hour before Friday’s release that he was “looking forward to seeing” the figures, spurring market speculation that the report would be upbeat, and it was. In addition to payrolls topping economists’ forecasts, the unemployment rate had been projected to remain at 3.9 percent, while wage gains exceeded estimates for 2.6 percent.

Upward Pressure
The jobless rate fell further below Fed estimates of levels sustainable in the long run, a potential source of upward pressure on wages and inflation, according to some economists. The fiscal boost from the Republican-backed tax cuts may also boost inflation at a time when the economy is near full employment, while a protracted trade war, sparked by Trump administration tariffs, would pose a growth risk.

Revisions to prior reports added a total of 15,000 jobs to payrolls in the previous two months, according to the figures, resulting in a three-month average of 179,000.

Economists estimate that monthly payroll gains of less than 100,000 are sufficient to keep pushing down the unemployment rate, which is derived from a separate Labor Department survey of households and is near levels considered consistent with at or below full employment.

The payroll gains in May were fairly broad-based, with construction adding 25,000 jobs and manufacturing adding 18,000. Service providers boosted employment by 171,000, led by increases in retail; education and health services; leisure and hospitality; and transportation and warehousing. Auto and parts makers and temporary help services recorded declines.

The number of employed people in the workforce rose by 293,000, the report showed, while the number of unemployed decreased by 281,000, helping push down the jobless rate.

Labor Health

The participation rate, or share of working-age people in the labor force, decreased to 62.7 percent from 62.8 percent the prior month. The employment-population ratio, another broad measure of labor-market health, rose to 60.4 percent from 60.3 percent. Fed Governor Lael Brainard noted in a speech Thursday that the employment-to-population ratio for prime-age workers remains about 1 percentage point below its pre-crisis level.

The participation rate remains a closely-watched measure for central bankers. While improving prospects for employment and wages are helping attract people who were on the sidelines of the job market, the retirements of older workers have been exerting downward pressure on participation.

The tight job market is helping lift worker pay. Average hourly earnings rose 0.3 percent from the prior month, topping projections for 0.2 percent, following a 0.1 percent gain, the report showed. The 2.7 percent gain for the 12 months ended in May followed a 2.6 percent advance.

A separate measure, average hourly earnings for production and non-supervisory workers, was even more upbeat, increasing 2.8 percent from a year earlier, the most since mid-2009. That followed a 2.6 percent gain in April.

Investing.com – The Canadian Ministry of Finance published lists of American goods, the duties on which will be increased from July 1. On appropriate measures, the Canadian authorities went after the US decision to increase tariffs on imports of steel and aluminum, Kommersant reported.

The Ministry of Finance of Canada has submitted two lists – duties on goods in the first list will grow by 25%, and on products from the second – by 10%. The first list included metal products, including various pipes and wires. The second list included food and drinks – in particular, yoghurts, coffee, maple syrup, licorice sweets, pizza, strawberry jam, orange juice, ketchup, whiskey, as well as hair varnishes, detergents, toilet paper, playing cards, foil , sleeping bags. It is expected that the introduced tariffs will affect the import of goods worth $ 16.6 billion. “Countermeasures will continue until the United States abolishes its trade restrictions with respect to Canada,” the ministry said. The agency specified that by June 15 all interested organizations can submit their arguments on a certain product that has been included in the lists.

Since today, the US has decided to extend duties on imports of steel and aluminum to the countries of the European Union, Canada and Mexico. The new tariffs will affect in total the import of these goods worth more than $ 40 billion. In response, Brussels intends to increase duties on a number of American goods, similar measures were prepared by Mexico, Kommersant writes.

Investing.com – The US dollar rate rises against the euro and the yen in anticipation of data from the US labor market.

According to the average forecast of analysts, unemployment in the country in May remained at the level of 3.9%, and the number of jobs in the economy grew by 200 thousand, according to MarketWatch.

ICE U.S. Index Dollar, showing the value of the US dollar against the six major world currencies, rose by 0.17%. Meanwhile, the indicator WSJ Dollar, which tracks the dynamics of the dollar against 16 major world currencies, increased by 0.21%.

As a result of May, the first indicator increased by 2.4%, the second – by 1.7%. The euro exchange rate against the dollar dropped by 3.2%, against the pound sterling – by 3.4%, while the yen strengthened by 0.5%.

A member of the Board of Governors of the Federal Reserve, Leyl Brainard, said on Thursday evening that the continuation of a gradual increase in interest rates would be acceptable in light of the labor market situation and inflation. However, she noted that world events, including the political crisis in Italy and the prospects for a trade war, create some risks for the Fed’s forecasts.

As of 9:42 Moscow time, the euro fell to $ 1.1678 against $ 1.1693 at the close of the last session.

The value of the single European currency to Japanese rose by this time to 127.55 yen compared to 127.23 yen on the previous business day. The dollar’s rate rose to 109.20 yen against 108.82 yen on Thursday.

(Reuters) – US oil inventories fell by 3.62 million barrels to 434.51 million barrels last week, the Energy Information Administration (EIA) reported yesterday.

According to the EIA, gasoline stocks rose by 0.53 million barrels to 234.43 million barrels, and distillate stocks increased by 0.63 million barrels to 114.63 million barrels.

Analysts had expected oil reserves to drop by 0.53 million barrels, while gasoline and distillate stocks would decrease by 1.4 million barrels and 1.3 million barrels, respectively.

Bloomberg.com — Italy is taking its turn at roiling global markets, momentarily scaring the bejeezus out of investors who braced for a potential exit from the euro zone amid this latest political crisis.

Central banks are struggling to balance fresh stresses with the temptation to follow the global tightening cycle. And President Donald Trump’s tariffs on some of America’s closest allies and the U.S.-China trade tango gave us more reason to stay on edge.

Here’s our weekly wrap of what’s going on in the world economy.

When in Rome

The long-simmering political crisis in Italy reached a full boil earlier this week, throwing global markets into turmoil before populists parties agreed to form a government on Thursday. It all gave central bankers globally a new headache. The European Central Bank has plenty of tools to help out, but Italy might not like the terms. Bank of Italy’s chief warned about a crippling loss of trust, just as bond yields soared – and could be close to a breaking point. Investors are already mulling whether this means fewer Federal Reserve interest-rate hikes this year.

There was plenty more crisis talk in Stockholm during a gathering of some of the world’s leading economists. Spain’s bubbling tensions could mean it’s the next crisis victim. German Chancellor Angela Merkel said bankers deserve blame for the flare-ups in populism, including in Italy. Venezuela’s Nicolas Maduro is asking for help on how to turn around his own disastrous economy. And an embattled Pakistan probably will seek an IMF bailout.

Central Bank Headaches

The Bank of Canada held interest rates but won’t be able to head off increases much longer. Even at 20, the ECB hasn’t quite grown up, though at least euro-area inflation picked up in May. Denmark’s experiment with negative rates is taking a hit with lower inflation projections and a Bank of Japan alumnus warns that policy makers are driving banks to excessive risks. Among the already-stressed emerging markets: Indonesia, fully in the crosshairs as one of the most debt-risky nations in Asia, raised interest rates for a second time this month, in an unscheduled meeting that marked the chief’s debut decision. The Reserve Bank of India could follow next week. Turkey’s showing some healing as the central bank did more damage control and brought more clarity to its interest-rate regime, reassuring markets.

U.S. v. China

While not quite the roller coaster it was last week, U.S.-China trade drama carries on, with U.S. advisers displaying more infighting and Trump threatening more tariffs that would take effect shortly after a mid-June import-list deadline while China cuts duties. Bloomberg Economics sees the Trump talk as more noise than signal. Alaska thinks it has the answer for how to shrink the U.S. trade gap with China. Here’s a timeline of the U.S.-China trade battles.

Meanwhile, the world’s two largest economies are in decent shape. China’s got some “May-mentum,” according to Bloomberg Economics, and exports are healthy even as the government deals with longer-term challenges around shadow banking and housing speculation. U.S. consumers are happy, but wages will have a hard time catching up to inflation. Canada’s Justin Trudeau told Bloomberg he’s skeptical that rampant U.S. fiscal borrowing can keep the good times rolling, and former Secretary of State Jim Baker says China already is the new global superpower.

Trade War

After an initial waiver for its closest allies, the U.S. administration announced it’s slapping tariffs on steel and aluminum imported from the European Union, Canada and Mexico. The move caused outrage at the meeting of G-7 finance chiefs and is set to prompt tit-for-tat tariffs on U.S. goods including bourbon and nail polish. The U.S. decision also adds a new wrinkle to one of its other most pressing trade files: Nafta talks with Canada and Mexico.