Wednesday, June 21, 2017

Markets retreat led by US crude falling to the $42s, a 10 month low

Dow pulled back another 57 (closing near the lows), decliners over advancers almost 2-1 & NAZ gained 45.  The MLP index was off 2 to the 276s (another multi month low) & the REIT index fell 1+ to the 352s.  Junk bond funds slid lower & Treasuries were flattish.  Oil sank to a 10 month low & gold crawled higher (more on both below).

AMJ (Alerian MLP Index tracking fund)

Live 24 hours gold chart [Kitco Inc.]

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A pickup in sales of previously owned US homes signals the housing market is making progress despite inventory constraints that are sending prices to all-time highs, according to the National Association of Realtors.  Contract closings rose 1.1% to a 5.62M annual rate (est. 5.55M) from revised 5.56M the prior month.  The median sales price rose 5.8% y/y to record $252K.  Inventory of available properties fell 8.4% from May 2016 to 1.96M, the 24th straight year-over-year decline.  Wages have been steadily increasing, unemployment is at a 16-year low & Americans are feeling confident about the economy, factors that support continued demand for housing.  Mortgage rates are also near historically low levels after erasing a post-election surge.  At the same time, buyers are limited by inventory shortages that have kept property prices rising faster than worker pay.  There's little sign that any supply rebound is in the pipeline.  Construction starts for new homes have declined for 3 straight months & permits were at a one-year low in May, according to gov data.  The increase in sales for previously-owned properties contrasts with an 11% drop in Apr for new-home sales, which account for about 1/10 of the market.  “It is a very fast-moving market, meaning that homes placed on the market are being picked up very fast by buyers,” Lawrence Yun, NAR's chief economist, said.  “We have job creation, yet home creation is not breaking out. There’s sizable pent-up demand.”

U.S. Home-Sales Pickup Signals Market Withstanding Weak Supply

Philadelphia Fed Pres Patrick Harker said the Sep meeting could be a good time for the central bank to begin the process of shrinking its balance sheet.  Harker stressed that no final decision had been made & negative economic data would delay the start of the program.  Fed officials agreed earlier this month on details to allow a fixed amount of assets to run off the $4.5T balance sheet every month.  The initial cap will be set at $10B.  The Philadelphia Fed pres, who is a voting member of the Fed policy committee, said he advocated a "pause" on rate hikes while the central bank starts to pare its balance sheet.

Fed's Harker Says Plan To Start To Shrink Balance Sheet Could Start In September

Gold prices settled higher for the first time in 3 sessions, finding support as the $ weakened.  Philadelphia Fed President Patrick Harker said (above) he advocated a "pause" on rate hikes while the central bank starts to pare its balance sheet.  Prices had ended yesterday at a 5-week low.  Aug gold rose $2.30 (0.2%) to settle at $1245 an ounce.

Gold Settles Higher For First Time In Three Sessions

Oil prices fell to a 10-month low in heavy trading, as nagging fears about the global crude glut fed a sell-off that was interrupted only briefly after news of a larger-than-expected drop in US inventories.  US crude futures touched a low of $42.13, the lowest since Aug 2016, down 3% today.  Since peaking in late Feb, crude has dropped by more than 20%.  The US Energy Information Administration said crude inventories declined 2.7M barrels in the latest week, exceeding expectations for a 2.1M-barrel drop.  This data supported prices only briefly.  Compliance with an agreement by OPEC & other producers to cut output by 1.8M barrels per day from Jan reached its highest in May.  However, production is rising in Nigeria & Libya, exempt from the deal, offsetting cuts by other OPEC members.  Nigeria's crude exports are set to surpass 2M barrels per day (bpd) in Aug, highest in 17 months, as the country recovers from militant attacks that crippled production in 2016.  Investors were discouraged by data showing that oil refineries in China, the world's top crude importer, are cutting operations during the peak demand summer season.  So far this year, oil has slid 20%, its weakest performance since 1997 in H1, a period when prices have tended to rise.  Brent has risen in H1 in all but 6 years over that period.

Oil drops to 10-month low; biggest first-half slide in 20 years

There was buying in tech related stocks, giving NAZ a boost today.  But the rest of the stock market is soggy & remains heavily overbought long term (shown in the chart below).  Declining prices for oil is being taken seriously by stock traders.  Demand that is less than robust can be considered evidence of sluggish economic growth around the globe.  Popular stock averages continue to be close to record highs (Dow is up more than 3K in the post election rally), but a correction is needed to flush out investors who are "Nervous Nellies."

Dow Jones Industrials


Markets fluctuate as oil steadies

Dow lost 7, decliners slightly ahead of advancers & NAZ recovered 24.  The MLP index fell a fraction to 278 & the REIT index was up pennies in the 353s.  Junk bond funds hardly budged & Treasuries slid lower.  Oil inched higher (more below) & gold was off a tad.

AMJ (Alerian MLP Index tracking fund)


Crude Oil43.55



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Oil languished in a bear market as a persistent global supply glut meant prices were unmoved by risks ranging from tropical storms in the Gulf of Mexico to geopolitical tensions in the Middle East.  Front-month futures rose 0.2% after closing yesterday more than 20% below their Feb peak.  Potential bullish factors barely lifted prices, including Tropical Storm Cindy halting service at a major oil terminal in the Gulf of Mexico, a shake-up in the Saudi royal family & Iran's Oil Minister Bijan Namdar Zanganeh saying that OPEC may decide to make deeper cuts.  Oil has returned to levels last seen before OPEC & allies including Russia decided in Nov to cut production to drain a global glut.  Relentless supply gains in the US & renewed output from Libya are putting those efforts to boost prices in jeopardy.  A joint OPEC, non-OPEC committee concluded yesterday that the market won't rebalance until Q2-2018, beyond the current expiry of the group's output agreement.  West Texas Intermediate for Aug delivery was at $43.65 a barrel, up 14¢.  The Jul contract expired yesterday after dropping 97¢ (2.2%) to $43.23, the lowest close since Sep 16.

Saudi Arabia's King Salman designated his son as his successor, paving the way for the young, assertive prince to assume the throne at a time when it is facing tumultuous change at home & intensifying rivalries in the Middle East.  The new crown prince, Mohammed bin Salman, is the elderly monarch's 31-year old son & minister of defense.  He ascended to the upper reaches of power in the kingdom when his father became king in early 2015 & then set about spearheading an ambitious economic agenda to reduce Saudi Arabia's dependence on oil & carve out a more muscular foreign policy in a volatile region.  He replaces as crown prince Prince Mohammed bin Nayef, a nephew of the king, who was stripped of all his positions, including interior minister.  His ouster effectively ends the political career of a royal who was one of DC's most trusted security partners & was known as the country's counterterrorism czar.   Saudi state television broadcast footage of Mohammed bin Nayef pledging allegiance to his successor, in an apparent display of royal unity after the changes announced.  By appointing his own son as his designated successor, the 81-year old King Salman upends decades of royal tradition.  Since the reign of King Abdulaziz Ibn Saud, the founder of the modern Saudi state who came to power in 1932, the throne has passed from brother to brother among his sons.  One of King Salman's first acts as monarch was to remove a half-brother as his heir & to appoint 2 younger princes in the line of succession, Prince Mohammed bin Nayef & Prince Mohammed bin Salman, a change that shocked many royals.  The king was able to take such bold action partly because of his stature within the House of Saud & has long cultivated good ties with his extended family.  Prince Mohammed bin Salman's ascension signals a potential generational shift, one that would bring the monarchy more in line with the country's young population.  But it also risks a backlash within the vast House of Saud, whose members have long ruled thru consensus among its various branches.

Saudi King Salman ousts nephew as Crown Prince, installs son

Global stocks extended losses today following a drop in oil prices & gov bond yields, although Chinese shares got a modest boost after MSCI said it would add the country to its emerging-markets index.  Banks, insurance companies & car makers were the worst performers in Europe as lower oil prices dragged down inflation expectations & gov bond yields.  The Stoxx Europe 600 fell 0.6%.  Asian markets outside China closed lower amid losses in energy companies & banks, while futures pointed to a 0.2% opening dip for the S&P 500.  The S&P 500 & Dow posted their biggest daily losses in over a month yesterday as oil prices dropped to their lowest level since Sep, dragging some shares of oil companies.

Global shares extend losses amid oil's weakness

Greece's prime minister said that his bailout-reliant country will "very soon" be in a position to tap bond markets again, which would be Greece's first test of investor sentiment since 2014.  Alexis Tsipras told his cabinet that this was a result of last week's deal with European creditors, which eased fears Greece might face another brush with bankruptcy this summer.  That's evident in the sharp fall in the interest rates the markets are ascribing to Greek gov bonds.  The yield on the benchmark 10-year stands at 5.5%, down sharply from levels seen during the more acute phases of the Greek debt crisis.  "I believe that in the near future the downwards trend of yields will continue, so that we can very soon be in a position, under very good terms, to make our first trial effort to tap markets," Tsipras said.  For Greece to end its bailout program next summer, it will have to be able to borrow on bond markets at affordable rates for the money it needs to meet its debts.  Its only bond issue since it became dependent on intl bailouts 7 years ago was in May 2014, when it raised €3B with a 4.75% coupon.  But his election in early 2015 on promises to ditch bailout-linked austerity & his subsequent confrontational negotiations with creditors, which led to a 3rd bailout & even more austerity, drove borrowing costs out of reach again.

Greece's Tsipras lays out prospect of bond market return

Not much happening in the stock market as DC returns to its chaotic self.  In the rest of the world, the news from Saudi Arabia is significant.  Leadership at this important country is changing.  The decline is a major setback for the economy.  Then there is the fight against terrorism where it intends to  become a larger player.  The Dow is absorbing all this calmly, at least so far.

Dow Jones Industrials