Thursday, August 27, 2015

Higher markets on revised GDP data and Chinese stimulus

Dow advanced 210, advancers over decliners 5-1 & NAZ added 70.  The MLP index rose 9+ to the 349s (still down more than 200 from the record last year) & the REIT index went up 2+ to 302.  Junk bond funds climbed higher & Treasuries were sold.  Oil is back to 40, its version of a rally, & gold retreated.

AMJ (Alerian MLP Index tracking fund)

CLV15.NYM....Crude Oil Oct 15...40.05 Up ...1.45 (3.8%)

GCQ15.CMX...Gold Aug 15.....1,118.40 Down ...6.20  (0.6%)

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China’s gov resumed its intervention in the stock market & has been cutting holdings of US Treasuries this month to support the yuan, according to leakers.  Authorities want to stabilize equities before a Sep 3 military parade celebrating the 70th anniversary of the World War II victory over Japan.  Treasury sales allow policy makers to raise dollars needed to bolster the yuan after a shock devaluation 2 weeks ago.  China revived its equity purchases after the gov's absence from the market earlier this week contributed to the biggest 2-day selloff since 1996.  Under a new exchange-rate regime announced Aug 11, the central bank relies on intervention to manage the yuan instead of its daily fixing.  China’s Nov 2013 pledge to let markets play a decisive role in the economy is being put to the test after a record-long boom in the Shanghai Composite Index turned into a bust.  The country’s interventionist response to the equity tumble last month spurred foreign investors to withdraw funds at a record pace & prompted the IMF to urge Chinese officials to eventually unwind the measures.  China is seeking an IMF endorsement of the yuan as a reserve currency, a goal that some analysts have said is being used by reformist policy makers to reduce the state’s role in markets.  The Shanghai Composite swung from a loss of 0.7% to a 5.3% gain in the last hour of trading, ending a rout that erased more than $5T of value since mid-Jun.  The gov bought large-company stocks.  China had halted its stock-market intervention in the first 2 days of this week as policy makers debated the merits of an unprecedented rescue package.

China Intervened Today to Shore Up Stocks Ahead of Military Parade

The economy grew more than previously estimated in Q2 on bigger gains in consumer & business spending that show the US expansion got back on track.  A surge in inventories also signals such strong growth will be difficult to sustain in the short run.  GDP rose at a 3.7% annualized rate, exceeding all estimates & up from the 2.3% rate the Commerce Dept reported last month.  American households, bolstered by gains in employment, rising home prices & cheaper fuel costs, will probably continue to spur the economy in H2.  At the same time, a record surge in stockpiles represents another headwind for manufacturers already contending with a rising dollar & slumping emerging markets that have hurt exports.  The forecast called for a 3.2% gain in GDP.  The economy grew at a 0.6% pace in Q1, restrained by harsh winter weather, a labor dispute at West Coast ports & a slump in energy-industry investment after oil prices dropped.  The report also offered a first look at corp earnings.  Before-tax profits rose 2.4% in Q2, after dropping 5.8% Q1.  From the same time last year, profits were down 0.5%.  The biggest driver of the upward revision was a bigger gain in business investment, which included stronger readings on construction, research & development & inventories.  The 8.6% advance in spending on intellectual property was the largest since Q4-2007.  The surge in stockpiles is a double-edged sword because, while it boosted growth, companies will probably need to trim the amount of goods on hand in Q3, leading to cuts in production that will restrain GDP.  Stockpiles climbed at a $121B annualized pace compared with an initially estimated $110B, & added 0.2 percentage point to economic growth.  Following the Q1 $112B increase, it marked the biggest back-to-back gain in inventories since records began in 1947.

Economy in U.S. Grew More Than Forecast in Second Quarter

Claims for US jobless benefits declined to a 3-week low, indicating persistent demand is encouraging employers to maintain headcounts.
Unemployment applications dropped 6K to 271K, according to the Labor Dept.  The forecast called for 274K jobless claims.  Demand for skilled workers as the unemployment rate falls is convincing hiring managers to keep staffing levels consistent with sales.  Pay raises, alongside strengthening job security, would help provide a bigger boost to consumer spending.  Applications for benefits dropped to 255K in mid-Jul, the lowest level since 1973.The 4-week average of claims, a less-volatile measure than the weekly figure, rose to 272K from 271K in the prior week.  The number continuing to receive jobless benefits increased 13K to 2.27M in the latest week & the unemployment rate among people eligible for benefits held at 1.7%.  Since the beginning of Mar, claims have held below the 300K level that is consistent with an improving labor market.

Claims for Jobless Benefits in U.S. Fall to Three-Week Low

Buyers have returned & are bidding up prices.  The revision in GDP data along with China throwing more money into the stock market are encouraging signs for the bulls.  But stocks have been thru an unusually volatile time this month & more crazy swings may lie ahead.  Dow is still down more than 1K in Aug & roughly 10% YTD.  This has been one difficult month.

Dow Jones Industrials

stock chart 


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