Tuesday, September 16, 2014

Markets waver before the Federal Reserve meeting

Dow lost 8, decliners a little ahead of advancers & NAZ fell 6.  The MLP index recovered 6+ to the 529s & the REIT index went up 1+ to the 298s.  Junk bond funds drifted lower & Treasuries had modest gains.  Oil climbed after OPEC’s Secretary General said the group may cut output targets next year (see below) & gold inched higher.

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CLV14.NYM....Crude Oil Oct 14...93.40 Up ...0.48 (0.5%)

GCQ15.CMX...Gold Aug 15.....1,238.80 Up ...0.40 (0.0%)

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OPEC Secretary-General Abdalla El-Badri
Photo:   Bloomberg

OPEC may cut production next year, its Secretary-General Abdalla El-Badri said.  Its daily output target could fall 500K barrels to 29.5M barrels in 2015, El-Badri said after talks with Russian Energy Minister Alexander Novak.  The group’s monthly report on Sep 10 showed demand for its oil will drop to 29.2M barrels a day in 2015 from 29.5M this year.  Saudi Arabia cut its crude supply by 408K barrels a day in Aug, the biggest reduction since the end of 2012.  Brent crude is trading below $99 a barrel & is close to the lowest in more than 2 years.  US crude supplies are surging while those from Libya are rebounding & a conflict in Iraq has mostly spared the nation’s exports.  “Our production will be maybe 29.5 million barrels per day in 2015, not 30 million barrels,” El-Badri said. “This is an outlook, not a decision.”  Brent crude has lost about 14% since mid-Jun, when Islamic State fighters gained territory in Iraq.  “I am not really concerned about the prices declining at this short term,” El-Badri said. “This is a fluctuation of seasonal behavior. When we’re coming to the fall, things will look better. I think the price will rebound by the end of the year.”  OPEC officials, including Saudi Arabian's Oil Minister, have said they see no urgent need to respond to oil’s drop.  Russian & OPEC analysts will meet in spring, the Russian Energy Ministry spokeswoman said.

OPEC Secretary-General Says Group May Pump Less Oil in 2015

The producer-price index was unchanged, matching the forecast, after a 0.1% rise the prior month, according to the Labor Dept.  Over the past 12 months, wholesale prices rose 1.8%.  The PPI excluding food & energy rose 0.1% from a month earlier.  Falling energy costs & subdued global markets are helping to limit inflation.  Muted price pressures have allowed Federal Reserve officials room to keep interest rates low even as they’re on pace to end the monthly asset purchase program in Oct.  Compared with 12 months earlier, companies paid 1.8% more for goods & services, up from a 1.7% year-over-year rise in Jul.  The core index also increased 1.8% in the year ended Aug after a 1.6% gain.  The cost of services increased 0.3% in Aug, reflecting higher transportation costs.  Prices for goods decreased 0.3% & were up 1.7% since Aug 2013.  Energy costs declined 1.5% last month after a 0.6% drop in Jul.  Wholesale food costs also fell, dropping 0.5%, the most in 3 months.  Today’s PPI reading is one of 3 monthly inflation gauges from the Labor Dept . The CPI, due for release tomorrow, was probably unchanged in Aug.  A report last week showed the cost of imported goods fell 0.9% last month.

Wholesale Prices in U.S. Were Little Changed in August

The Ukraine conflict may take years to resolve, rattling Russia's investment climate & threatening to push its economy into recession at the current level of sanctions, former Finance Minister Alexi Kudrin said.  “It’s no quick task to resolve the situation in the southeast of Ukraine,” Kudrin said.  Finding a solution will require 2-3 years “at a minimum” under what he called an “optimistic scenario.”  Ukraine’s stalemate against separatists will weigh on Russia’s investment climate until ties improve with the US & EU, said Kudrin, a long-time ally of Putin & one of the few Russian politicians the president has publicly called a friend.  After leaving the gov in Sep 2011, Kudrin has served on the president’s economic council & is a member of the supervisory board of Sberbank, the country’s biggest lender.  The assessment signals concern over the toll exacted by Russia’s worst standoff with the US & EU in decades following Putin’s annexation of Crimea.  The US & EU have imposed sanctions against Russia over the crisis, leading to intensified capital flight & the ruble’s deprecation to a record low.  In retaliation, Russia last month banned some food imports from the US & its allies.  At the current level of penalties against Russia, its economy runs the risk of zero growth or contraction, according to Kudrin.  A slump of 5% is possible within a year if Russia is cut off from the SWIFT banking transaction system, he said, adding that Iran-style curbs may lead to an even bigger decline lasting 2-3 years.  “I think in the nearest two or three years, we’ll have growth close to zero, maybe even negative, primarily because of the lack of investments,” Kudrin said.  “The current level of investment is not enough for development and maintaining growth above 1 percent.”  The economy is forecast to grow 0.4% this year, according to the central bank after growing only 1.3% last year, the slowest pace since a 2009 contraction.

Ukrainian Crisis Seen Lasting Years by Kudrin in Threat to Russian Economy

There is little going on in the markets today, while they wait for the Federal Reserve to give its economic forecast.  Intl conflicts are a major negative for the markets & the thought they could drag on for years is depressing.  The US & EU are at war, whatever they call it, with ISIS.  That raises military expenditures & will aggravate deficit spending.  Additional spending brings upward pressure on interest rates.

Dow Jones Industrials

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