Markets drift lower after the Fed does not hike rates

Dow lost 34 (finishing at the lows), advancers over decliners & NAZ gave up 8.  The MLP index rose 2+ to the 305s & the REIT index added 2+ to the 345s.  Junk bond funds were little changed & Treasuries rose, taking the yield on the 10 year Treasury below 1.6% (not far from record lows).  Oil declined again & gold continued climbing, nearing 1300 (see below).

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Crude Oil      47.93   -0.56 (-1.15%)





Janet Yellen said next week's referendum in the UK on whether to remain in the EU was a factor in the decision to hold interest rates steady.  “It is a decision that could have consequences for economic and financial conditions in global financial markets,” Yellen said.  A vote on Jun 23 by Britons to leave the EU “could have consequences in turn for the U.S. economic outlook,” she said.  Growing worries over a potential British exit have roiled financial markets, sending stocks lower around the globe in the past week, pushing investors into safe havens like German bonds & US Treasuries, & weakening the £.  5 opinion polls published this week showed “Leave” supporters ahead.  The BOE has begun a series of extra market operations aimed at boosting bank funding around the referendum. The UK joined the European Economic Community, a predecessor body to the EU, in 1973.  It has the 2nd-largest national economy within the 28-member group, behind Germany.

Yellen Says Brexit Vote Influenced Fed Call to Hold Rates Steady

Gold advanced as fewer Federal Reserve officials expect the central bank to raise US interest rates more than once this year.  While the forecast of 17 policy makers remained at 2 qtr-point hikes this year, the number of officials who see just one increase rose to 6 from one in the previous forecasting round in Mar.  Low rates are a boon to gold, which doesn’t offer yields.  Gold has rallied more than 6% this month as concern over the global economic-growth outlook & Britain's referendum on leaving the EU spur demand for the metal as a store of value.  The $ fell after the Fed's projections, boosting the appeal of bullion as an alternative asset.  Traders put the odds of a US rate increase in Jul at about 10%, down from 53% at the start of this month.   Gold gained 8 to $1296.

Gold Jumps as Fewer Fed Officials See Multiple Rate Hikes in ’16

The International Energy Agency, anticipates near-equilibrium between supply & demand in global crude markets next year.  If OPEC members can't resolve some massive output disruptions, that will turn into a significant shortfall.  World oil production in 2017 will very nearly match consumption, ending several years of oversupply, the IEA forecast.  For that to happen, OPEC would have to pump an extra 650K barrels a day over the year based on IEA data.  That would require solutions to militant attacks in Nigeria, deep political divisions in Libya or an economic crisis in Venezuela.

The supply & demand forecasts from the IEA, are important because they shape trading.  The oil price has been on a roller coaster since 2014, with a global surplus driving prices down 75% to a 12-year low of about $28 a barrel in Jan, only to rebound to $50 amid supply disruptions & unprecedented investment cuts.  By the end of next year, OPEC will need to pump nearly 1M barrels above last month's production level to keep the market in balance based on IEA data.  Fulfilling the IEA’s forecast would require OPEC to overcome some major hurdles.  In Nigeria, oil production has slumped to a 28-year low of 1.37M barrels a day, about 480K below its full capacity.  A militant group has been targeting pipelines & other infrastructure in the African nation for several months.  Libyan output remains just a fraction of the 1.6M barrels a day pumped before the toppling of Moammar Qaddafi in 2011.  The nation pumped 270K barrels a day in May, a decrease of 80K from the previous month as a dispute between rival govs in the west & east halted tanker loading at the port of Hariga for several weeks.  Many of its oil fields & export terminals are in the hands of armed groups with competing interests.  In Venezuela, a severe economic crisis brought about by the slump in oil prices is making it difficult for the state oil company to pay its contractors for work necessary to sustain output.  Output last month was 2.29M barrels a day, the lowest since 2009, & the nation is on track for a drop of 100K barrels a day this year.   Additional output could be provided by Iran, which is restoring exports after nuclear-related sanctions were lifted.  The country will boost output to more than 3.7M barrels a day next year, having pumped at a 5-year high of 3.6M in May.  Saudi Arabia, the biggest exporter, could also increase output during the summer months to cover an increase in domestic demand, it said.

OPEC Turmoil Could Turn IEA’s Balanced Market Into Shortfall

Stocks were bought after the announcement that rates were not being raised, but there was selling in the last ½ hour of trading which took the averages into the red.  The thought of rate hikes later this year must have spooked traders.  With growing uncertainty about the future of oil prices, higher stock prices will need a new reason to rise.

Dow Jones Industrials