Monday, August 31, 2015

Markets sell off on worries about an interest rate hike

Dow dropped 114, decliners over advancers  3-2 & NAZ pulled back 51.  The MLP index slipped back 1+ to the 358s even though oil had a spectacular day & the REIT index lost 6+ to the 299s.  Junk bond funds slid lower & Treasuries were sold, raising the yield on the 10 year Treasury to 2.2%.  Oil surged to the 48s (see below) & gold was flattish.

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CLV15.NYM....Crude Oil Oct 15....48.46 Up ...3.24 (7.2%)

Live 24 hours gold chart [Kitco Inc.]

Oil capped the biggest 3-day gain in 25 years after OPEC said it’s ready to talk to other global producers to achieve ‘fair prices’ & the US gov reduced its crude output estimates.  NY crude surged 27% in 3 days, the most since 1990 when Iraq invaded Kuwait.  The contract has climbed more than 20% from its closing low on Aug 24, meeting the common definition of a bull market.  OPEC, responsible for about 40% of the world’s supply, said it’s willing to talk, “but this has to be on a level playing field.”  Prices erased last week’s drop to a 6-year low as the OPEC comments & signs that the US shale boom is fading faster provided optimism that a global supply glut will evaporate sooner than estimated.  A measure of oil-price fluctuations rose to a 5-month high as traders sought protection from market swings.  West Texas Intermediate for Oct delivery surged 3.98 (almost 9%) to close at 49.20, the highest since Jul 21.  Prices had slipped as much as 1.62 to 43.60 earlier.  Volume was almost double the 100-day average.

OPEC Says It's Ready to Talk to Producers, Oil Jumps to 1-Month High

The Chicago Business Barometer, also known as the Chicago PMI, dipped to 54.4 from 54.7 in Jul, similar to the forecast of 54.5.  A reading above 50 reflects growth, while a sub-50 print indicates contraction.  The index held up above its 6-month average of 49.1.  Most subindices declined in Aug.  Order backlogs fell 1.7 points to 46.2, the 7th straight month of contraction.  While employment, aided by the Jul surge in output & orders, rose in Aug to the highest since Apr, the labor component remained in contraction for the 4th consecutive month.  From Jul, the gauge rose 2.9 points to 49.1.  In response to a special question, 63% of survey participants said they didn't plan to expand their workforce over the next 3 months.   Meanwhile, production & new order indexes eased, but both remained above their 12-month averages & were significantly up from the depressed levels seen in Feb-Jun.  The prices paid gauge fell sharply to 47.3, down 7.2 points from Jul, alongside steep declines in commodity prices.  Supplier deliveries rose into expansion, hitting the highest level since Mar.   The Aug survey was conducted before the rout in Chinese markets.

Midwest Manufacturing Activity Slides

Atlanta Federal Reserve pres Dennis Lockhart said Americans shouldn’t worry about a recession, despite recent turmoil in global markets.  “We’re not falling into a recession,” he said.  “The economy actually is performing quite solidly, I think. Most of the data we’ve looked at recently had been positive and has confirmed my basic view-- and that is we’re growing at a moderate pace, we’re making steady progress in employment markets and I have every reason to believe that will continue.”  Lockhart added that from the central bank’s point of view, monetary policy has been supportive of the economic growth America has achieved, but to continue to build on that momentum, the economy has to rely on itself, not accommodative policies.  One of those substantial improvements has to come in the form of inflation, for which the Fed has set a 2% target, & full employment in the labor market before the Fed hikes rates.  "I do believe there is still a considerable amount of slack in the employment markets, particularly represented by under employment by people who are working part time involuntarily,” he added.  As far as when the Fed is likely to raise rates, Lockhart said, essentially, it’s a wait-and-see approach.  “I think the next three meetings should all be live meetings and I think we should keep our options open. I don’t think I can ignore the events of the past couple of weeks, but I think I have to evaluate them as a risk to the economy. Always stay focused on the broad, general economy, not the financial economy per say, but the overall economy,” he said.

Lockhart: Still Significant Slack in the Labor Market

Aug can only be described as a dreadful month for the markets.  Dow plunged 1.1K, for one of its worst months ever.  The market crash in China & low oil prices (which were just reversed) were the major culprits.  A looming rate hike by the Fed in Sep did not help, weighing on the markets today when rising oil prices could have been viewed as bullish.  Sep is statistically the worst month for stocks & that is followed by Oct, remembered for brutal crashes.  Dow fell 1.3K YTD.  With fears about rising interest rates dominating trader thinking, tough times lie ahead for the markets.

Dow Jones Industrials

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