Monday, July 24, 2017

Markets slide lower ahead of Fed meeting

Dow gave back 39, decliners over advancers 3-2 & NAZ went up 3.  The MLP index hardly budged in the 298 & the REIT index was off a fraction to the 351s.  Junk bond funds were a little lower & Treasuries are heading south.  Oil climbed in the 47s (more below) & gold advanced 9 to 1255, one its highest levels in several months.

AMJ (Alerian MLP Index tracking fund)

CL=FCrude Oil46.28

GC=FGold   1,255.00

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OPEC & allies indicated they weren't planning any big changes to their supply deal, even as oil prices remain below $50 a barrel amid growing skepticism that their output cuts are working.  Capping rising oil production from Nigeria & Libya, both exempt from the current agreement, won't be on the agenda, at the meeting today.  There'll be no discussion of deeper cuts, Saudi Minister of Energy & Industry Khalid Al-Falih told reporters.  Without any changes on that scale, OPEC &, Russia & allies will be doubling down on a bet that rising demand will combine with the existing curbs to rapidly deplete fuel stockpiles, buoying prices in H1.  That could prove to be a risky wager if production from nations not bound by any restrictions, notably US shale producers, keeps growing to fill the gap left by OPEC.  “Of course, rising output from Libya and Nigeria increases market supply,” Russian Energy Minister Alexander Novak said.  “But at the same time we have to remember that demand for oil is also quite high, and the countries that supported the stabilization initiative have been very assiduous in honoring their commitments.”  Oil slumped into a bear market last month & Brent crude, the intl benchmark, is trading at about $48, a gain of less than $2 since the cuts were agreed on last year.  While demand will be almost 2M  barrels a day higher in H1 compared with H1, according to OPEC estimates, rising supply inside & outside OPEC suggests the cuts won't put a significant dent in bloated global inventories.

OPEC Signals No Big Changes to Supply Deal at Russia Meeting

Former Federal Reserve Governor Daniel Tarullo said weak inflation could weigh on the central bank's discussions about whether to raise interest rates again, with only little risk that prices will surge out of control.  “People are thinking about what’s going on with inflation,” Tarullo, who stepped down from the Fed on Apr, said.  “We don’t know whether in the next couple of meetings those concerns will be strong enough that the Fed will hold off from another rate increase or not.”  Fed Chair Janet Yellen told lawmakers on Jul 13 that policy makers were watching inflation “very carefully” after weak readings clouded the prospects for its rise to the Fed's 2% target, though she didn't signal a change in the outlook for further gradual rate increases.  Officials raised borrowing costs in Jun & are projected to hike again before year-end.  “It’s a little hard to make the case for the kind of inflation runaway that we saw in the late ’70s,” Tarullo added.  The risks of runaway inflation “seem pretty modest at this juncture.”  A survey showed that a clear majority expects the Fed will wait until Dec before raising interest rates again & will begin shrinking the $4.5T balance sheet in Sep.  The FOMC wll begin a 2-day meeting tomorrow.

Tarullo Says Weak Inflation Clouding Fed's Rate-Hike Outlook

Greece will return to the bond market after a 3-year hiatus, banking on investor interest in its recovery story.  The country, which was the epicenter of the European sovereign crisis that began in 2009, is looking to sell 5-year bonds.  It'is also inviting holders of 4.75% bonds due in 2019 to tender the notes for cash.  The bonds are expected to be priced tomorrow.  With the sale, the gov of Prime Minister Alexis Tsipras is seeking to chalk out a path for an exit from the current bailout program, which ends in Aug 2018, while also capping the country's financing needs in 2019, expected to be about €19B  ($22B).  After not being able to convince creditors to reduce its debt burden & being left out of the ECB's bond-purchase program, Greece is testing the market.  The bond sale follows the successful conclusion of the 2nd bailout review & the disbursement of the first part of the €8.5B tranche by the European Stability Mechanism on Jul 10.  The IMF agreed to a new $1.8B conditional loan for Greece on Thurs, with disbursement contingent on euro-zone countries providing debt relief.  S&P Global Ratings raised the country's sovereign credit-rating outlook to positive on Fri, while affirming the long-term foreign currency debt rating at B-, 6 levels below an investment-grade ranking.

Greece to Return to Bond Market After Three-Year Hiatus

The stock market is marking time ahead of the Fed meeting & earnings reports.  The Fed meeting is not expected to produce any excitement, but earnings are another story.  They always have to potential for drama & the early ones have been coming in inconclusive.  There will be more hearings in DC, another distraction from getting anything done.  The popular stock average remain essentially at record highs.

Dow Jones Industrials

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