Monday, December 12, 2016

Dow sets record in mixed markets after proposed limits on oil production

Dow gained another 39 (for another record), decliners over advancers 2-1 & NAZ lost 31.  The MLP index was off a fraction in the 301s & the REIT index added 2+ to go over 340.  Junk bond funds inched higher & Treasuries were a little weaker.  Oil went up 1 (off session highs) to the high 43s (more below) & gold was up slightly.

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On paper, OPEC’s supply deal could drain almost ½ the global oil glut within 6 months.  Record inventories accumulated since 2014 will dwindle at a rate of about 760K barrels a day in H1-2017 if OPEC & 11 other oil producers deliver the supply cuts pledged on Dec 10.  Over the 6 months covered by the deal, that would remove 46% of the 300M-barrel stockpile surplus  Reaching that target would require full compliance with the almost 1.8M-barrel cut promised by OPEC, Russia & their other allies.  That's an achievement that has eluded previous supply deals.  Bringing about a crude-supply deficit of 760K barrels a day H1 would require OPEC to fully implement its 1.2M barrel-a-day cut, a goal that is challenged by rising production from exempt members Libya & Nigeria.  Among non-OPEC producers, it would be crucial that Russia completely follows through on its pledge to gradually curb output by as much as 300K barrels a day.  Full compliance with the deal would mean OPEC crude supply in H1 is about 400K barrels a day lower than demand.  If the 11 non-OPEC nations stick to their pledges, their combined output would be 17.97M barrels a day over the period, almost 360K barrels a day lower than the IEA’s current forecast.

OPEC-Russia Deal Could Drain Almost Half the Global Oil Surplus

Unease is once again permeating China's financial markets.  The Shanghai Composite Index sank 2.5%, the yuan fell toward an 8-year low, while gov bonds tumbled, with the one-year sovereign yield rising 15 basis points. There is a long list of reasons for the synchronized selloff, from Trump's questioning of the decades-old One China policy, to a regulatory crackdown to insurers' stock investments, higher money market rates & concern that property prices are poised to fall.  The losses are a reminder of the turmoil that dogged China’s financial markets at the start of the year, which gave way to relative calm throughout much of 2016 even as the yuan tracked lower.  A resumption in headline-grabbing losses would pose a challenge to the gov's attempts to cut corp leverage, whether in equities or property, while also risking fueling faster capital outflows as the dollar surges.  The unpredictable nature of Trump's comments on trade policy only adds to the uncertainty.  After China’s botched introduction of circuit breakers & a series of weaker currency fixings roiled global financial markets in Jan, the Communist Party took steps to reduce volatility & restore investor faith.  While such measures were successful earlier in the year, this month has seen marked deterioration in the stock & bond markets.  The Shanghai Composite's decline today was the biggest in 6 months, while the ChiNext gauge of smaller companies traded in Shenzhen sank 5.5%.  The 10-year sovereign bond yield rose 9 basis points to a one-year high of 3.19%, & the yuan fell 0.1% to 6.91 per $.

China’s Stocks, Bonds, Yuan Slump in Unison on Liquidity Concern

The federal gov deficit jumped sharply in Nov but for the first 2 months of the budget year is running 10% lower than a year ago.  The Treasury says the deficit for Nov totaled $137B, compared to a deficit of $44B in Oct.  For the first 2 months of the new 2017 budget year, the deficit totals $181B, 10% below the same period a year ago.  However, that improvement mainly reflects calendar quirks that moved benefit payments from Oct back into Sep, the final month of the 2016 budget year.  The deficit for all of 2016 totaled $587B, a 34% spike from the previous year.  And the Congressional Budget Office is forecasting that the deficit will worsen further this year.

Federal budget deficit jumps to $136.7 billion in November

Early gains in the stock market were trimmed later.  The limit on oil production is a bit fuzzy in a world where cheating is common & some producers have big budget problems.  In addition, Janet will speak on Wed.  If she gives any signals about more rate hikes next year, bullish optimism will fade fast.  Then there is Trump & all the enthusiasm he has brought to the stock market.  The bulls have forgotten that he is known for being unpredictable, something the stock market does not like.  Dow remains vastly overbought. 

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