Markets drift lower and record the worst start for a new year

Dow dropped 167 (finishing near the lows), decliners over advancers 5-2 & NAZ gave up 45.  The MLP index rebounded 3+ to the 268s & the REIT index lost 3+ to the 314s.  Junk bond funds were mixed & Treasuries advanced.  Oil is barely hanging in above 33 (see below) & gold was weak, bu remained above the important 1100 resistance level.

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CLG16.NYM

....Crude Oil Feb 16

....33.09

...0.18

(0.5%)

The worst start to a year for global financial markets sparked the biggest weekly outflow of cash from equity mutual funds since Sep.  Investors pulled $8.8B from funds that track stocks around the world, according to EPFR Global, as the weakening of China's currency rekindled concern that slowing growth there would spread.  Redemptions at US-based stock funds hit at a 17-week high, with investors favoring funds that target Europe & Japan, where central banks have pledged continued support.

“As was the case in early 2015, mutual fund investors tip-toed rather than sprinted into the new year,” EPFR Global said.  “Their caution was quickly justified as another spasm in Chinese equity markets rippled through global stock exchanges.”  The S&P 500 is on track for its worst-ever 5-day start to the year & its worst weekly performance since the Aug selloff, while the MSCI All-Country World Index has plunged more than 5% this year.  China spurred market turmoil amid renewed concerns that its sinking yuan reflects weakness in its economy that could spread to other regions.  In the US, large-cap exchanged-traded funds saw the heaviest redemptions, according to EPFR.  Meanwhile, 9 of the 11 major US sector funds tracked by EPFR saw outflows during the period, with technology posting the most at $570M.  Industrial sector funds saw a 5th consecutive week of outflows, the most since early 2015.

Investors Pull $8.8 Billion From World Equity Funds in 2016 Rout

It will take the Fed at least 6 years to reduce its bloated balance sheet back to more a normal size, San Francisco Federal Reserve Bank pres John Williams said, as officials take a gradual approach to withdrawing crisis-level stimulus.  “Our plan is to shrink the balance sheet ‘organically,’ if you will, through the maturation of the assets,” Williams said.  “It’s likely going to take at least six years to get the balance sheet back to normal, which is in keeping with the overall approach to removing accommodation gradually.”  The Federal Reserve is slowly weaning the economy off of ultra-easy monetary policy that saw it hold interest rates near zero for 7 years & balloon the balance sheet to around $4.5T thru 3 rounds of buying mainly Treasuries & mortgage-backed securities.  “The Fed has started the process of raising interest rates, but the path to normal will be gradual,” Williams said.  He added the economy “still has a good head of steam,” that he expected would help keep the unemployment rate on track to decline to around 4.5% by mid-year.  “Looking forward, I see a labor market that’s growing ever stronger and will reach maximum employment on a broad set of measures very soon,” he said.  Even so, Williams argued that the economy still needed support from Fed policy to help it overcome headwinds from slower growth abroad & the fallout from a stronger dollar, which was why officials expect a gradual pace of rate hikes.  “If my aim is true and things evolve as expected, the path will look more like an airplane’s gentle ascension than a rocket shooting straight up,” he said.

Fed's Williams Sees Balance Sheet Taking Six Years to Normalize

Crude oil prices erased earlier gains to fall for a 5th day & were poised for a weekly decline of 10% amid global oversupply & a bleak demand outlook that made it hard to guess when the market would find a floor.  Brent & US West Texas Intermediate (WTI) crude turned direction after trading steady earlier on the strength of stocks.  The 2 crude benchmarks hit 12-year lows earlier in the week after a plunge in China's stock market roiled global markets.  Since the selloff in oil began 18 months ago, investors have wondered how long & deep the slide would be as prices fell from above $100 a barrel to below $40, looking to break below $30 next.  Trader sentiment is still extremely negative & short positions are still at excessive levels. So, downside risks still remain.  Over the past year, the world has been producing 1.5M barrels a day more oil than it consumes. OPEC & the International Energy Agency expect global demand growth to slow in 2016 to around 1.20-1.25M barrels per day from a very high 1.8M bpd in 2015.

Oil Falls on Global Oversupply Concerns

This sorry performance by the stock market is the worst weekly start EVER.  At midday, there was an attempt that took Dow in the black, but additional selling ended that brief rally.  When an outstanding jobs report can not bring out buyers, the stock market is in deep trouble.  Falling prices for oil & an uncertain outlook for China is weighing on stocks.  The withdrawal of stock funds aggravated what was already a difficult time for stocks.  Earnings are coming & they can not be counted on for ending the selling in stocks.  Dow dropped more than 1K in week 1 & the outlook is dreary.

Dow Jones Industrials