Tuesday, August 12, 2014

Markets pause after 2 day rally as energy is weak

Dow dropped 7, advancers just ahead of decliners & NAZ slid 1.  The MLP index pulled back 1+ to the 515s after yesterday's enormous gain & the REIT index was little changed in the 305s.  Junk bond funds were mixed to higher & Treasuries rose slightly with yields at or near their lowest levels in more than a year.  Oil lost ground & gold inched higher.

AMJ (Alerian MLP Index tracking fund)

CLU14.NYM...Crude Oil Sep 14...97.29 Down ...0.79  (0.8%)

GCQ14.CMX...Gold Aug 14.....1,315.00 Up ...6.50 (0.5%)

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China's Premier Li Keqiang
Photo:   Yahoo

China’s trust assets expanded at the slowest pace in 2 years as the gov cracks down on shadow banking & investors reassess the risks of the high-yield investments.  Trust companies’ assets under management climbed 6.4% to 12.5T yuan ($2T) as of Jun 30 from 3 months earlier, the China Trustee Association said.  That’s the slowest growth since Q1-2012 & compares with an average annual gain of 50% since 2008.  Premier Li Keqiang is grappling with sustaining economic growth while containing financial risks after shadow banking exploded in China from 2010.  Trust assets under management fell 240B yuan in Jun from May, the first monthly decline, the statement said without specifying a time period.  Trust products’ average yield rose to 6.87% from 6.44% in Q1.  The combined profits of trust companies rose 12% to 28.9B yuan in H1.  China averted its first trust default in Jan as investors in a 3B yuan high-yield product issued by China Credit Trust were bailed out days before it matured.  The company last month delayed payments on a 2nd product.  The banking regulator tightened rules for new trust products in Apr as borrowers from coal miners to developers struggled to make repayments.  Li wants to aid companies & economic growth by boosting the supply of bank loans & limiting the more expensive shadow financing so that firms have lower borrowing costs.

China Trust Asset Growth Slows in Shadow Banking Campaign

German Investor Confidence Slumps as Ukraine Crisis Worsens
Photo:   Bloomberg

German investor confidence fell to the lowest level since 2012 as the crisis in Ukraine & a sluggish euro-area recovery damp the outlook for Europe’s largest economy.  The ZEW Center for European Economic Research index of investor & analyst expectations, which aims to predict economic developments 6 months in advance, dropped to 8.6 in Aug from 27.1 in Jul.  The forecast a was for a decrease to 17.  This was the 8th consecutive monthly decline & the biggest in more than 2 years.  A worsening standoff between Russsia & EU is clouding the outlook for a German economy that probably contracted for the first time since 2012 in Q2.  The disruption to trade threatens to weigh on the revival in the euro area, which has already seen Italy slip back into recession.  A gauge of current conditions declined to 44.3 in Aug from 61.8 the previous month, ZEW said, & a measure of expectations for the euro area plunged to 23.7 from 48.1.

German Investor Confidence Slumps on Ukraine Crisis

The International Energy Agency (IEA) cut estimates for oil demand growth this year & next after the annual expansion in fuel consumption slowed to 700K barrels a day in Q2, the lowest level since early 2012.  The resulting supply surplus has meant that Libya, seeking to restore crude exports choked off by political feuding, is struggling to find buyers.  Logistical constraints in southern Iraq may prove a bigger hurdle to bolstering output than violence in the north, it added.  “Despite armed conflict in Libya, Iraq and Ukraine, the oil market today looks better supplied than expected, with an oil glut even reported in the Atlantic basin,” the agency said.  “The market appears confident that OPEC can deliver the production increase needed from it to meet rising demand expected in the second half of the year.”  The agency reduced estimates for global oil demand growth in 2014 by 180K barrels a day following a weaker assessment of the world economy by the IMF.  Consumption will increase 1M barrels a day (1.1%) this year to average 92.7M a day.  While demand growth will rebound next year, the pace will be 90K barrels a day slower than previously expected because of lower estimates for China & Russia.  Global consumption will expand in 2015 by 1.3M barrels a day to 94M a day.  Total demand levels for this year are little changed from last month’s projections, while growth is lower because of upward revisions to consumption data for previous years.  The agency’s outlook for demand in H2 is stronger than previously assessed, meaning the amount of crude required from the OPEC will be 30.8M barrels a day, higher than last month’s estimate.  That’s about 360K a day more than the organization pumped in Jul.  Output from OPEC’s 12 members climbed 300K barrels a day in Jul to a 5-month high of 30.4M a day, as Saudi Arabia raised production & supplies recovered in Libya.  The Gulf kingdom, OPEC’s biggest member & de facto leader, increased output to 10M barrels a day, the most since Sep.  Libyan output almost doubled to 430K barrels a day.  “The Atlantic market is currently so well supplied that incremental Libyan barrels are reportedly having a hard time finding buyers,” the agency said.  “Many in the market seem more focused today on potential short-term downward price pressures from a further increase in Libyan production.”

Weakest Oil Demand Growth Since ’12 Allays Supply Risk, IEA Says

The Dow is still fairly close to its recent record high above 17K, even though all is not well around the world.  Chaos is the main theme in intl relations with numerous military engagements.  The economic front is not much better.  China cannot find its footing to reactivate its growth engine & its financial picture may be less rosy than it has been, the euro recovery is stumbling (that's being kind) & while the US economy Q2 showed better numbers, uneven consumer demand continues to bring spotty results for retailers.  Dow is down a smidgen YTD & has lost its interest in setting new record highs. 

Dow Jones Industrials

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