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Tuesday, July 5, 2016
Markets decline on fragile growth prospects
Dow dropped 109, decliners ahead of advancers more than 3-1 & NAZ lost 43. The MLP index fell 5+ to 310 & the REIT index added 1 to 364 (a new record). Junk bond funds slid lower & Treasuries surged, taking yields to or near record lows. Oil sank to the 47s (see below) & gold rose on rising demand for the classic safe haven investment.
Mark Carney pledged to shore up financial stability as he warned that
the risks from Britain's decision to leave the EU have
started to crystallize. “There is the prospect of a material
slowing of the economy,” the Bank of England governor said after the central bank published its
semi-annual Financial Stability Report. “The number of vulnerable
households could increase due to a tougher economic outlook.” The governor took steps to spur bank lending & signaled rate cuts
or more quantitative easing could be in the offing this summer. Carney's
third appearance in 12 days since the UK vote highlights his role as a
beacon of stability while political infighting heightens uncertainty
over how the country will proceed & how severe the economic fallout
will be. The
Financial Policy Committee's measures included reducing
capital requirements for banks, which Carney called a “major change.”
The countercyclical capital buffer was cut to zero from 0.5% of risk-weighted assets, a move the
FPC said would raise the capacity for lending to companies &
households by as much as £150B ($197B). The
buffer, designed to be bolstered in good times & eased in downturns
to support lending, had been increased, effective in Mar next year. Officials now see it staying at zero until at least Jun 2017. Carney & the FPC gave a stark warning to banks that they
should not use the extra funding they now have to increase div
payouts.
Confidence of British executives plunged & pessimism doubled as the
Brexit turmoil stoked concerns that business investment & the
property market are poised to slump. An index published by YouGov & the Centre for Economics & Business Research tumbled to 105 from 112.6 in the 3 days ended Jun 23, the
referendum date. The survey, Jun 28-Jul 1, also found the proportion of businesses that are pessimistic
about the economic outlook climbed to 49% from 25%. “These
figures show what is happening on the ground and they suggest a
significant shock reaction,” said the institute's director, Scott Corfe.
“Not only are businesses feeling much more pessimistic in general about
the state of the economy, but their own expectations for domestic
sales, exports and investments over the next 12 months have gone off a
cliff.” The survey was released hours after Standard Life Investments suspended trading in its £2.9B ($3.9B) UK Real Estate fund
amid a flood of withdrawals, the strongest signal yet that the turmoil
from the Brexit vote will probably hit the property market. Underscoring
executives' concerns that policy makers will fail to act with both main
political parties in chaos, 5 of the biggest UK business groups
appealed for gov action.
Brexit referendum nerves already took their toll on UK services firms in Jun as customers postponed or canceled orders, sending business
confidence to a 3½-year low, Markit Economics said. A Purchasing Managers' Index fell to 52.3 from 53.5 in May, weaker than the 52.8 forecast but
above the 50 mark dividing expansion from contraction. “A further
slowing, and possible contraction, looks highly likely in coming months
as a result of the uncertainty created by the EU referendum,” Markit said. “Hiring has
also clearly been hit as firms lack clarity on the economic outlook.” Almost
¾ of economists expect the UK to
slide into recession & Bank of England Governor Mark Carney has said
that the outlook for the economy has “deteriorated.” He reinforced that
view on today, saying that evidence since the vote suggest that
there’s a “prospect of a material slowing in the economy.”
Crude dropped with equities on a gloomy outlook for the global economy & amid signs that oil stockpiles remain ample, down as much as 3.3%.
Nigerian oil output rose last month following repairs to infrastructure
that had been damaged by militant attacks
while gasoline supplies on the East Coast reached a record.
Crude
has risen more than 80% from a 12-year low in Feb. Yet the price rebound has
spurred activity in the American shale patch, where drillers last week
brought back the most oil rigs of any week this year. Contango, the
structure where prices for delivery today are lower than those in future
months, is shrinking, a sign that stockpiles are plentiful. Nigeria
pumped an average of 1.53M barrels a day in Jun, up about
90K a day from May. Militants have
resurfaced this month, with the Niger Delta Avengers group claiming attacks on 5 crude-pumping facilities. Production
in Saudi Arabia, the biggest crude exporter, rose 70K barrels a
day to 10.33M last month. The kingdom
typically burns more crude in the summer to generate electricity for air
conditioners. Libya raised output by 40K barrels a day to 320K. Gasoline
stockpiles along the East Coast surged to a record 72.5M
last week, according to the Energy
Information Administration. Imports to the region jumped to a 6-year
seasonal high. Gasoline production in the US hit a record the previous
week as refineries ran full-out to meet driving-season demand.
The new month is getting off to a gloomy start as reality about the British exit from the EU is sinking in. This will not be pretty, no way around that. So far markets have been ignoring that simple thought. In addition, oil has been trending sideways for weeks as bullish thoughts are being reduced. Times should be tough for the stock market.
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