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


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