Monday, June 13, 2016

Markets waver as gold continues to slide lower

Dow lost 10 (above the early lows), decliners over advancers about 5-4 & NAZ fell back 9.  The MLP index slid back 1+ to 308 & the REIT index went up 1+ to the 346s.  Junk bond funds inched higher & Treasuries also went up.  Oil dropped again (see below) & gold rose, pushing towards 1300.

AMJ (Alerian MLP Index tracking fund)

Crude Oil   48.23    -0.84 (-1.7%)

Gold     1,284.30      8.40 (0.7%)

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Crude slid to the lowest in a week after US oil explorers deployed more drilling rigs, signaling that companies may be able to revive output at current prices.  Oil fell as much as 1.8% after dropping 4.2% in the previous 2 sessions.  Rigs targeting crude in the US rose by 3 to 328 last week, a 2nd weekly gain, the longest since Aug, according to Baker Hughes.  Iran is seeking to boost output by 600-700K barrels a day over 5 years from fields west of the Karoun River along the Iraqi border, Oil Minister Bijan Namdar Zanganeh said.

Oil has surged 85% from a 12-year low in Feb as the global glut is trimmed by unexpected disruptions & a slide in US output, which is under pressure from OPEC's policy of pumping without limits.  Crude closed above $51 a barrel on Jun 8, the highest in more than 10 months, before falling the rest of the week.  While the number of active oil rigs in the US rose for a 2nd week, the nation's output is still well below last year's peak, & explorers have idled more than 1K drilling machines since the start of last year.

Oil Falls to One-Week Low as U.S. Drillers Ramp Up Operations

China’s economy steadied in May as factory production held up & consumers & the gov offered support against diminishing growth in private investment, which has been hurt by declines in old-line industries such as coal.  A monthly tracker for GDP growth showed a 6.9% gain for May, little changed from Apr & comfortably within the leadership's annual target for 2016.  The gauge had swung from around 6.3% in the first 2 months of the year to 7.1% in Mar, when a lending spree juiced growth.

Industrial production rose 6% from a year earlier in May, matching estimates, National Bureau of Statistics data showed.  Retail sales climbed 10% last month, while fixed-asset investment increased 9.6% in the first 5 months of 2016, missing all forecasts & the slowest pace since 2000.  Combined with improving imports & moderating factory-gate deflation last month, the data suggest that policy makers have underpinned the near-term outlook with monetary stimulus & fiscal support, even as restructuring initiatives in some industries start to bite.  The data deluge contained a mixed bag of news.  The Shanghai Composite Index was 1.7%.  Among the positives, the surveyed unemployment rate edged lower in May, with 1.34M jobs added in urban areas in the month, taking new jobs created in 2016 to 5.77M.  On the negative side, private fixed-asset investment slowed to 3.9% for the year to date.  Policy makers' efforts to cool the property market took some steam out of that sector, with new home sales growth slowing.  Property investment growth, which in Dec hit a 15-year low, clocked a 7% pace for the first 5 months of 2016, slightly weaker than the 7.2% rate for the first 4 months.

China’s Economy Steadies Even as Investment Growth Slows

Cheaper oil prices since 2014 have probably been of little net benefit to the global economy & may even have been a drag on growth, according to the ECB.  “While most of the oil-price decline in 2014 could be explained by the significant increase in the supply of oil, more recently the lower price has reflected weaker global demand,” the ECB said.  “Although the low oil price may still support domestic demand through rising real incomes in net oil-importing countries, it would not necessarily offset the broader effects of weaker global demand.”  The analysis strikes at the ECB debate over whether it should be adding monetary stimulus to the euro-area economy as lower heating and fuel bills give consumers more spending power. Mario Draghi has argued that as well as depressing inflation, the ECB’s main challenge, a drop in energy prices can be a sign of subdued economic activity that needs to be countered.  “Assuming that, for example, 60 percent of the oil price decline since mid-2014 has been supply driven and the remainder demand driven, the models suggest that the combined impact of these two shocks on world activity would be close to zero, or even slightly negative,” the ECB report showed.

Brent crude dropped 76% in Jun 2014-Jan 2016.  That boosts disposable incomes in the euro area, a net energy importer, & so should spur the economic recovery.  The flipside on an intl level is that many oil-exporting countries have experienced a “severe” downturn.  In a period of subdued global demand, that has been accompanied by spillovers to other emerging economies.

ECB Says Oil-Price Slump Not the Global Boon It Might Have Been

With uncertainty about the FOMC meeting announcement on Wed, there is little for markets to do today.  But lower priced oil & rising gold prices (bets against stocks) are shaking confidence by the bulls. Janet is widely expected to leave interest rates untouched, but nervousness in the markets remains.

Dow Jones Industrials


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