Wednesday, June 7, 2017

Markets crawl higher ahead of Thursday events

Dow rose 43, advancers over decliners better than 3-2 & NAZ went up 21.  The MLP index added 1+ to the 302s & the REIT index was fractionally higher in the 347s.  Jun bond funds were little changed & Treasuries drifted lower.  Oil dropped to the 47s & gold drifted lower from recent highs.

AMJ (Alerian MLP Index tracing fund)


Crude Oil47.59



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The Organization for Economic Cooperation & Development (OECD) has cut its economic growth forecasts for the US this year & next, saying stimulative measures it had expected from the Trump administration would now likely be implemented later than the Paris-based research group had previously anticipated.  The OECD expects US growth this year of 2.1%, down from the 2.4% forecast it gave in Mar.  It also lowered its projection for 2018 to 2.4% from 2.8%.  The OECD raised its forecasts for the eurozone for both this year & next, & nudged up forecasts for Japan & China.  The OECD predicts global economic growth for 2017 at 3.5%, a slight increase from the 3.3% it predicted in Mar.  There are risks to its view, it concedes.  Namely, the OECD believes financial markets are anticipating even better economic growth outcomes than are likely, which heightens the risk of a "snap back" in asset prices.  The group also sees a potential red flag in housing markets because prices in some countries have risen to levels that have in the past preceded busts.  As for the ECB, the OECD recommends it wind down bond purchases in 2018 & raise its key interest rate by the end of that year.  That view is based on predictions for core inflation to slowly approach the target by the end of 2018.  The ECB next meets tomorrow & while no policy change is anticipated, financial markets expect at least a slightly rosier outlook from ECB head Mario Draghi.

OECD Cuts U.S. Growth Forecast On Belief Trump Stimulus Coming Too Slowly; Bumps Up Europe

China's foreign currency reserves rose in May for a 4th month ahead of a possible US interest rate hike that might put new pressure on Beijing's exchange rate controls.  The reserves, the world's biggest, increased $24B to $3.05T, according to gov data.  A sharp decline last year prompted Beijing to tighten controls on the outflow of money from the economy.  The Chinese controls could face a new test if the Federal Reserve decides at a meeting next week to raise interest rates.  That would draw money out of China in search of higher returns, which could require Beijing to raise its own interest rates or further tighten controls.  The Fed has signaled it expects to raise rates 3 times this year to ensure tighter labor markets do not trigger inflation pressures.  The central bank spent reserves to shore up the yuan's exchange rate after expectations that the Chinese currency would decline prompted investors to move money out of the country starting in 2015.  The reserves declined from a peak of $3.99T in Jun 2014 to just under $3T late last year.  Late last year, the net outflow was tens of billions of dollars a month, which prompted Beijing to step up scrutiny of proposed foreign investments & ban some activities by individual investors.  In its latest tactic, the foreign currency regulator announced Fri that Chinese banks must report all overseas automatic teller or credit card transactions above 1K yuan ($150) by their customers beginning Sep 1.  The tighter controls have temporarily set back Beijing's gradual moves to encourage more use of the yuan abroad for trade.  The People's Bank of China bases the yuan's state-set exchange rate on a basket of currencies that is believed to be dominated by the $.  That required Beijing to intervene to keep the yuan in line with the $ as the greenback rose over the past 2 years.  The latest controls appear to have locked the yuan to the $, possibly to send a clear signal it won't fall further.

China's reserves rise for 4th month

The US & Mexico struck a trade deal for sugar, avoiding a potential trade war.  Commerce Sec Wilbur Ross says that though it wasn't necessary, the administration wanted to get the sugar deal out of the way before moving on to efforts to reform NAFTA (North American Free Trade Agreement).  “This has been a very nettlesome, very aggravating factor for quite some little while and we thought it was a very good idea to try to get it out of the way so that we could get on with the much bigger parts of NAFTA that need changing,” Ross said.  Ross responded to US sugar producers calling for more concessions from Mexico.  “We basically gave them the vast bulk of everything that they had asked for.  We’re now down to, in their minds, a technical issue and that is, in the event that the Dept of Agriculture forecast of sugar needs are wrong and it turns out that much more needs to be brought in, exactly what are the circumstances under which the Mexican sugar could come in.”  Though there are slight changes in price in this deal compared to the 2014 agreement, Ross didn't expect a big change in sugar prices for consumers, adding, “I don’t think that this deal should result in a great big spike.”  According to Ross the deal would benefit US sugar refiners.  “The major part is that there will be a much higher percentage of raw sugar available to the United States refiners.  Therefore they will be able to do better because they will make what now is roughly a nickel of refining margin rather than it being refined in Mexico.”  Ross weighed in on efforts to reform NAFTA, “NAFTA is an ancient agreement, it’s really the first of the big trade agreements that the U.S. made and therefore it’s a bit obsolete.”  “It doesn’t address the digital economy at all, in fact there really wasn’t a digital economy back then.  It didn’t address very much about services, especially not about financial services and as you know service is part of our economy, both domestically and in terms of exports, have become very, very important.  It also didn’t talk about natural resources.”

US, Mexico sugar deal paves way for NAFTA reform: Wilbur Ross

Stocks are in a holding pattern ahead of tomorrow's news.  With all that is going on around the world, the Qatar story is not getting much attention.  But it's important.  Saudi Arabia & its Arab allies have broken ties with Qatar because it thinks that country is not serious about fighting terrorism.  That situation is in flux & will not likely be resolved soon.  Meanwhile popular stock averages are at or next to record highs.  Hard to believe!

Dow Jones Industrials


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