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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.
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.
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.
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.
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.
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