Wednesday, November 29, 2017

Markets struggle as the Dow climbs to records while Nazdaq tumbles

Dow soared 103, decliners a little ahead of advancers & NAZ tumbled 87.  The MLP index dropped 2+ to the 352s & the REIT index was fractionally lower in the 358s.  Junk bond funds fell & Treasuries were weak.  Oil slipped to the 57s on worries about tomorrow's meeting in Vienna (more below) & gold dropped 10 to 1288.

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The US economy grew at a modest to moderate pace thru mid-Nov as price pressures strengthened & the labor market tightened, a Federal Reserve survey showed.  The central bank's Beige Book economic report, based on anecdotal information collected by the 12 regional Fed banks thru Nov 17, said business contacts also reported a brightening view as they look ahead.  The findings could help bolster the case for an interest-rate increase when policy makers next meet in 2 weeks.  “There was a slight improvement in the outlook among contacts in reporting districts,” according to the report.  The Beige Book's release followed a Commerce Dept report showing the economy expanded by 3.3% annualized pace in Q3, faster than an initially reported 3%.  That also dovetailed with congressional testimony by Fed Chair Janet Yellen, who described the ongoing expansion as “broad based across sectors as well as across much of the global economy.”  The lack of more significant wage pressures despite a hot job market continued to be a theme in the Beige Book.  “Most districts reported employers were having difficulties finding qualified workers across skill levels,” the report said.  Despite that, “wage growth was modest or moderate in most districts,” according to the report, which used similar language in Oct.  The report did note, however, that “price pressures have strengthened since the last report.”  Some districts reported higher costs for construction materials, while businesses in Richmond said they were able to hike prices for services ranging from information technology to elevator repair.  If price pressures persist, that could help resolve the mystery faced by Fed officials as they confront a tightening labor market & sluggish wages & prices.  That contradiction has complicated the task of deciding how quickly they should raise interest rates.

Fed Says Price Pressures Rising With Economic Growth Steady

The tech-heavy NAZ slipped further as investors shifted to financials that have been bolstered by strong economic data & encouraging comments from Fed officials.  The S&P technology index .SPLRCT, the best performing sector this year, dropped over 3.3%, its worst single-day decline since Jun 2016.  The high-flying tech stocks fell 3-5% while bank stocks climbed about 2%, putting the S&P financial index .SPSY on track for its best 2-day gains in nearly a year.  Fed chair Janet Yellen said today that a strengthening economy would warrant continued rate increases.  Her comments come a day after Fed chair nominee Jerome Powell said that the case for a Dec rate hike was coming together & hinted at lighter bank regulation.  The 2nd revision of Q3 DP showed growth increased at a 3.3% annual rate, up from the previously reported 3%.

Nasdaq drops further as techs fall out of favor

The White House says it does not anticipate the gov will be forced to shut down at midnight on Dec 8.  Gov funding expires that day & an extension is needed to keep the gov operating.  Pres Trump & Congress' top Rep & Dem leaders were to discuss spending today, but the Dems (Chuck Schumer & Nancy Pelosi) backed out after Trump criticized them on Twitter.  Trump met only with the Reps, House Speaker Paul Ryan & Senate Majority Leader Mitch McConnell.  White House spokesman Raj Shah says that officials "are not anticipating a shutdown" — despite the setback.  Shah says the White House thinks everyone will be able to work together, but "the developments of the past 24 hours are discouraging."

White House: 'We are not anticipating a shutdown'

With crude prices at 2-year highs, OPEC & allied oil producing-nations appear ready to agree to extend their output cuts at a meeting tomorrow after Iraq's energy minister said there was broad agreement for such a move.  Benchmark crude prices are now close to $60 a barrel, depending on the grades, up almost 20% since a year ago & the bets have been that OPEC & partners will try to keep supply tight by prolonging the daily 1.8M barrel output reductions agreed to a year ago.  For experts foreseeing such a scenario, the only question is for how long.  Some market watchers are predicting that production quotas first agreed on in Nov 2016 will now be stretched into all of 2018 & the comments by Iraq's Jabbar Ali Hussein Al-Luiebi strengthened such expectations.  Such concerted action would be renewed evidence that OPEC is once again a major player in controlling the oil market.  OPEC members in the past have regularly ignored production quotas in their drive for maximum profits.  But the cartel's strategy to flood the market, & drive US shale producers out of business, did not work.  So it reversed course last year, joining forces with oil powerhouse Russia & other oil producing allies to crimp supplies.  And with member states this time generally keeping to their production limits, OPEC's Secretary General Mohammad Sanusi Barkindo says the alliance has attained its goal.  "We have accomplished what naysayers thought would be impossible," he told a 24-nation meeting.  "The decisions we made were historic."  Even so, the strategy of continued cuts to drive up prices does not seem sustainable over the longer run.  With prices now at 2-year highs, US producers who mothballed operations when oil was cheap are coming back into the market in force.  US crude oil production already has grown by 15% since last year to nearly 10M barrels per day, just behind Russia & Saudi Arabia.  The International Energy Agency expects the US to become the biggest net exporter by the end of the 2020s.  The extra crude is welcome for now, with the global economy booming.  But at some point the balance could again tip from relatively tight supplies to an oversupply & a drop in prices.

OPEC and allies likely to extend production cuts at meeting

This was a highly unusual day for stocks.  The Dow was flying high (thanks to financials) while NAZ sank.  Don't see that very often.  Confusion in DC between a gov shutdown next week & the need to pass tax reform by Christmas has created a lot of uncertainty.  The rocket fired by North Korea makes matters worse.  At the same time in this crazy world, the Dow needs only 60 to reach 24K.  Meanwhile, gold, the classical safe haven investment, dropped today.  It's hard to make sense of it all!!

Dow Jones Industrials

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