Thursday, June 30, 2016

Markets rally for a third day on central bank stimulus talks

Dow added 235 (closing at the highs), advancers over decliners more than 3-1 & NAZ gained 63.  The MLP index rose a fraction to the 318s & the REIT index gained 3+ to the 362s, a new record.  Junk bond funds edged higher & Treasuries declined.  Oil sank to the 48s & gold was off a tad (see below).

AMJ (Alerian MLP Index tracking fund)

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Crude Oil Aug 16...48.40 Down ....1.48  (3.0%)

Live 24 hours gold chart [Kitco Inc.]

Mark Carney signaled the Bank of England could cut interest rates within months as the central bank tries to shield an economy rattled by the shock of Brexit & the chaos engulfing Britain's political classes.  In his 2nd televised address since the country voted to leave the EU, the governor said that officials won't hesitate to act when it comes to safeguarding the economy or the resilience of the financial system.  The BOE will also continue its liquidity auctions for banks on a weekly, rather than monthly, basis & consider a “host of other measures.”  The £ slumped as investors increased bets on a rate cut by Aug.  “It now seems plausible that uncertainty could remain elevated for some time,” Carney said.  “The economic outlook has deteriorated and some monetary policy easing will likely be needed over the summer.”  The comments capped a day full of political shocks.  Boris Johnson pulled out of the race to be the next British prime minister after a savage attack from former Brexit ally Michael Gove, who will now compete for the job with Home Secretary Theresa May.  That creates more uncertainty at a time when the opposition Labour party is already in disarray & the UK remains in limbo regarding its trading relationship with its biggest market.

Carney Says Brexit Fallout Makes BOE Summer Stimulus Likely

UK consumer confidence dropped this week after the country voted to leave the EU.  YouGov & the Centre for Economics & Business Research said their daily tracker of sentiment has dropped to the lowest in more than 2 years.  From a level of 111.9 earlier in the month, it has since slumped to 104.3.  Also, a separate report from GfK showed that households faith in the economic outlook was shaky even before the Brexit referendum.  The vote has created uncertainty about the possible future relationship of the UK & the EU, further complicated by Prime Minister David Cameron's decision to resign & leave his successor to start formal exit negotiations.  That’s increased tensions with other European leaders, who excluded Cameron from a meeting in Brussels & want the process to start soon.  “Consumer confidence has collapsed since the vote,” YouGov Reports said.  “Four days of uncertainty has wiped out the gains made over the last three years. It has not yet reached the depths of the financial crisis in 2008 but we expect it to decline further as some of the consequences of Brexit kick in.”  GfK’s survey, conducted in the 2 weeks thru Jun 15, suggests sentiment was already becoming gloomier before the outcome.  Its headline consumer index remained at minus 1 this month, but the measure of how consumers view the 12-month economic outlook slipped to minus 14 from minus 13, down 18 points from a year earlier.  “One trend that continued in the run up to the referendum is a deepening pessimism over the general economic situation,” GfK said.  “In these extraordinary consumer circumstances, all bets are off until we all know more. We can expect plenty of volatility in consumer confidence at least until Brexit negotiations are under way.”  GfK questioned 2K for its survey & YouGov’s index is based on 7K online interviews per month.

U.K. Consumer Confidence Is Buckling Under Brexit Pressure

Standard & Poor's Global Ratings cut its long-term credit rating on the EU to 'AA' from 'AA+' after the UK voted to leave the bloc.  "After the decision by the UK electorate to leave the EU...we have reassessed our opinion of cohesion within the EU, which we now consider to be a neutral rather than positive rating factor," the agency said.

S&P Cuts Rating on EU to 'AA' After Brexit

Prices at the gas pump are expected to reach an 11-year low on the Fourth of July, just as a record number of Americans prepare to hit the road during the holiday weekend.  The national average is expected to fall 50¢ from last year’s Independence Day mark to $2.27 a gallon, the cheapest since 2005.  Just 2 years ago, the average price of regular gasoline was much higher at $3.66 a gallon.  However, there is one wrinkle to price forecasts this weekend: gas taxes.  Coinciding with the start of a new fiscal year, several states are hiking or cutting their excise taxes on gasoline starting tomorrow.  As a result, regional gas prices could fluctuate to kick off Independence Day weekend.  Tax increases are in the pipeline for Maryland & Washington.  Maryland will add 0.9¢ to its rate, increasing gas taxes in the state to 33.5¢ a gallon.  Washington State's gas tax will climb to 49.4¢  a gallon, up 4.9¢.  NJ could become the 3rd state to raise gas taxes this year.  A bill making its way thru the legislature includes a 23¢ hike that would take the gas tax from 14.5¢  to 37.5¢ a gallon.

Fourth of July Gas Prices Dip to 11-Year Low--But Watch for Tax Hikes

Gold closed out the month lower today, but still gained nearly 25% YTD, as investors continue to navigate financial volatility sparked by the UK's decision to leave the EU.  Aug gold fell $6.30 (0.5%), for the session to settle at $1320, pulling back after finishing at a nearly 2-year high a day earlier.  Futures prices were up about 6.9% for Q2 & have climbed roughly 24.6% YTD.

Gold Down For The Session, But Up Nearly 25% Year To Date

There is an old adage that chaos can bring opportunity.  That is in play in the stock market.  Maybe, maybe not.  The exit for UK, a major country in the EU, brings uncertainty, but caution has been thrown to the wind by stock traders.  In 3 days Dow has recouped about all of its 1K loss from the prior 2 days.  That's high volatility at a time when gold (a bet against higher stock prices) is rising.  Playing with fire can be dangerous!

Dow Jones Industrials


Higher markets on reduced Brexit vote worries

Dow added 79, advancers over decliners 3-2 & NAZ went up 16.  The MLP index lost 2 to the 315s & the REIT index was up 4+ to 359 (record territory).  Junk bond funds were mixed & Treasuries were lower again.  Oil fell to the 48s & gold also slipped back.

AMJ (Alerian MLP Index tracking fund)


Crude Oil Aug 16.................48.63 Down ...1.25  (2.5%)


Gold Futures,Jul-2016...1,321.30 Down ...2.60  (0.2%)

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The number of Americans who applied last week for unemployment benefits rose to a level that's still consistent with steady improvement in the labor market.  Jobless claims increased 10K to 268K, according to the Labor Dept.  The forecast called for 267K.  Continuing claims decreased for the 3rd week in the last 4.  Companies are reluctant to layoff workers as skilled & experienced employees become difficult to attract in a tighter labor market.  Dismissals that are still hovering near 4-decade lows signal a recent slowdown in payrolls may be short-lived as household spending continues to fuel the economy.  For 69 consecutive weeks, claims have been below the 300K level, consistent with an improving job market.  That's the longest stretch since 1973.  The 4-week moving average held at 266K.  The number continuing to receive jobless benefits fell 20K to 2.12M & the 4-week average declined to 2.13M, the lowest since 2000.
The unemployment rate among people eligible for benefits declined to 1.5% from 1.6%.

Jobless Claims in U.S. Increased by 10,000 Last Week to 268,000

Oil is heading for the biggest quarterly advance in 7 years as falling US supply added to speculation the global surplus is easing as futures fell 2.6%.  Still, oil is headed for its best quarterly gain since Jun 2009.  US crude supplies declined a 6th week & output slipped to the lowest since Sep 2014.  Markets have whipsawed after the UK vote to leave the EU.

Supply disruptions (such as in Nigeria) & falling US output have helped cut a global surplus, sparking a rally of more than 85% since prices hit a 12-year low in Feb.  The International Energy Agency & OPEC forecast this month that the market is heading toward balance as demand growth outpaces supply.  US crude inventories dropped to 526.6M barrels, the lowest since Mar, the Energy Information Administration said.  Supplies climbed to an 87-year high of 543.4M barrels in the last week of Apr.  Production slipped 55K barrels a day to 8.62M last week, the EIA said.

Oil Heads for Best Quarter Since 2009

Puerto Rico's fiscal crisis is reaching a turning point as pres Obama plans to sign bipartisan legislation that would allow the island to escape from debts once viewed as ironclad.  The Senate yesterday, passed a bill that protects the island from creditors as it veers toward its largest default yet.  The legislation creates a financial control board to help restructure Puerto Rico's $70B in debt & oversee the island's finances, marking the largest federal intervention ever into the US municipal bond market.  Obama is likely to sign the measure today, one day before Puerto Rico Governor Alejandro Garcia Padilla has said the island will default on more than $1B on general-obligation debt.  “It is a critical first step toward economic recovery and restored hope for millions of Americans who call Puerto Rico home,” Obama said.  “I look forward to signing the bill into law.”  The territory had continued to pay the securities even as it rapidly went broke.  The bill passed by the Senate doesn't provide any additional funding, but it allows Puerto Rico to turn to federal court to cut its obligations & protects the gov from creditor lawsuits by putting them on hold.  In return, Puerto Rico is being forced to accept strict oversight by a control board that will have significant power over its day-to-day affairs.  The legislation also does little to alleviate the underlying economic conditions on the island that led to its vast accumulation of debt.

Congress Gives Puerto Rico a Path Forward as Debt Default Nears

Hard to believe that the stock market is trying to extend its bounce back to 3 days.  No problems have been solved relating to Britain leaving the EU.  But there are plenty of unhappy euro bureaucrats in Belgium who will make the exit difficult.  Stock market optimism is not well founded with gold just below its recent highs.  Even oil lost ground today.

Dow Jones Industrials