Monday, August 1, 2016

Markets slide lower as oil falls to $40

Dow lost 27, decliners over advancers 3-2 & NAZ gained 22.  The MLP index tumbled 10+ to the 307s on the global oil glut & the REIT index rose 1+ to the 377s (another record).  Junk bond funds drifted lower & Treasuries were weak.  Oil dropped big time to 40 (see below) & gold crawled higher.

AMJ (Alerian MLP Index tracking fund)

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Crude Oil Sep 16

 Live 24 hours gold chart [Kitco Inc.]

Oil fell below $40 a barrel for first time since Apr, falling into a bear market on concern that the global supply glut will expand.  Saudi Arabia cut prices to Asian customers as the country continues to fight for market share.  Drillers in the US boosted the number of rigs seeking oil for for a 5th week, the longest run of gains since last Aug.  US crude & gasoline supplies are at the highest seasonal level in at least 2 decades.  West Texas Intermediate settled 22% below its Jun peak today, meeting the definition of a bear market.

The persistence of the supply overhang is upsetting industry expectations.  WTI for Sep delivery dropped 3.7% to close at $40.06 a barrel, the first settlement below 200-day moving average since Apr, adding to the bearish pressure.  Saudi Arabian Oil will sell cargoes of Arab Light in Sep at $1.10 a barrel below Asia's regional benchmark, a pricing cut of $1.30 from August, the biggest drop since Nov.  The US oil drilling rig count climbed by 3 to 374, the highest level since Mar & the nation's crude inventories rose to 521M, keeping supplies more than 100M barrels above the 5-year average, Energy Information Administration data show.  Demand for crude is set to decline in the next few months.  US refineries typically reduce operating rates to perform seasonal maintenance as the summer driving season comes to an end, after the Labor Day holiday in early Sep.  Libya's state crude producer is working to resume oil shipments from 3 ports after a deal was struck to settle payments to local guards.  The move may triple production but only after blockades on oil fields that supply the ports are lifted.  National Oil Corp. “will now start working” with the unity gov to restart exports from the ports of Ras Lanuf, Es Sider & Zueitina, according to the NOC.

Oil Falls Below $40 for First Time Since April

The national average 30-year fixed home mortgage rate in the US fell to 3.36%, matching the record low first reached in Dec 2012, according to  Would-be home-buyers & homeowners looking to refinance existing mortgages at lower rates have benefited from a drop in US Treasury yields since UK voters decided in Jun to leave the EU.  A comparable Freddie Mac mortgage gauge watched by the industry is near a record low, at 3.48%.

U.S. Mortgage Rates Fall to Lowest on Record

China economy watchers were left scratching their heads on the state of the nation's manufacturing in Jul.  An official factory gauge & a private manufacturing measure headed in different directions, with the gov's reading slipping & Caixin Media & Markit Economics’s figure released later jumping to the highest since Feb last year.  Some investors focused on the stronger of the 2, with the Hang Seng China Enterprises Index rallying.  The Shanghai Composite slid amid continuing concern over potential curbs on wealth management projects.  The official manufacturing purchasing managers index was 49.9 last month, compared with the Jun reading of 50, which was also the estimate.  Non-manufacturing PMI was at 53.9 compared with 53.7 in Jun.  As in Jun, drag on official manufacturing index comes from medium & small enterprises.  Numbers below 50 indicate conditions are deteriorating.  By contrast, manufacturing PMI from Caixin Media & Markit Economics jumped to 50.6 in Jul, from 48.6 in Jun.  Both gauges at least suggest little significant deterioration in China's important manufacturing sector in Jul.  Meantime, the trend of outperforming services remains clear.  On the official gauge, a drop in a reading of new export orders, combined with a slump in South Korea's exports last month, suggest global demand remains tepid.

China Factory Gauges Splinter for July, While Services Advance

The macro economic news has not been that good but stocks kept rising for months anyway.  Falling oil prices are driving that home to the stock market & traders are catching on.  As shown in the chart below, Dow remains near its record high.  With the disconnect becoming more apparent to investors, there may be more selling in stocks.  The new month got off to a disappointing start. 

Dow Jones Industrials


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