Monday, December 31, 2018

Markets advance on US China trade hopes

Dow soared 265 with selling into the close, advancers over decliners 2-1 & NAZ rose 50.  The MLP index gained 2+ to the 221 (still depressed as shown below) & the REIT index was about even.  Junk bond funds went higher & Treasuries were purchased, taking the yield on the 10 year treasury down to 2.69%.  Oil went up to the 45s (more below) & gold inched up 1 to 1284.

AMJ (Alerian MLP Index tracking fund)

Live 24 hours gold chart [Kitco Inc.]

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China's economy & stock market are showing signs of softness amid an ongoing trade war with the US.  The country's Bureau of Statistics just announced that manufacturing activity shrank in Dec, for the first time in more than 2 years.  China's Purchasing Managers' Index was 49.4 this month, which was the weakest level recorded since Feb 2016 & it was the result of a drop in new export orders.  Meanwhile, the major Chinese stock index suffered double-digit losses in 2018.  The Shanghai Composite fell more than 24% for the year, its largest annual decline in a decade.  During Q3, China's GDP growth missed expectations, coming in at 6.5%.  The Trump administration has imposed tariffs on about $200B  worth of Chinese imports.  He had threatened to raise the tariff rate to 25%, but during the G-20 summit in Buenos Aires earlier this month Trump agreed to hold off on increasing tariffs for at least 90 days while negotiations continue.  Over the weekend, leaders from both countries had positive things to say about the prospects for trade progress following a phone call on Sat.  Meanwhile, the trade battle has rattled US investors, as well.  The US equity market is on track for its worst Dec performance since the 1930s & its 2nd down year since 2008.  The end of the year, in particular, has been marked by a pickup in volatility.  On the other hand, GDP growth has remained relatively strong throughout 2018, expanding at 3.4% in Q3.  In Q2, GDP the growth rate was 4.2%.  The downturn was attributed, in part, to a reduction in exports.

How the trade war is affecting China's economy

Trump’s endorsement could prove key to moving any plan forward, given the obstacles to overcoming a presidential veto.  And the GOP-dominated upper chamber is unlikely to vote on any bill the pres hasn't approved.  “It’s simple: The Senate is not going to send something to the President that he won’t sign,” a spokesman for Senate Majority Leader Mitch McConnell said.  To overcome a presidential veto, at least 55 Reps would have to vote with every Dem in the House.  Overcoming a veto would also require the votes of 67 senators.  Reps will control 53 senate seats in the next Congress.  The partial gov shutdown entered its 10th day on New Year's Eve with little signs of progress.  In a series of posts on Twitter, the pres re-upped his demands for border wall funding. 
“I campaigned on Border Security, which you cannot have without a strong and powerful Wall,” the pres posted.  “I’m in the Oval Office,” he wrote in another.  “Democrats, come back from vacation now and give us the votes necessary for Border Security, including the Wall.”

In a year when analysts predicted oil would surpass $100 for the first time in 4 years, the oil market instead experienced its worst annual loss since 2015.  The oil market's sudden about-face in Q4 has ended a 2½-year recovery for oil prices following the 2014-2016 downturn.  Analysts expect oil prices to rebound next year, but the geopolitical risks that have weighed on the market throughout 2018 will remain a big variable in the new year.  US crude settled at $45.41 a barrel, ending the year down nearly 25%.  At around $54 a barrel, intl benchmark Brent crude is down almost 20% in 2018.  The declines mark the first annual loss & the biggest yearly drop since 2015, when both contracts fell more than 30%.  Just 3 months ago, oil was trading at nearly 4-year highs.  While many analysts said the rally was unwarranted & warned a pullback was in the cards, few predicted the market would sell off so sharply.  From peak to trough, US crude has shed nearly ½ its value.  With the benefit of hindsight, it's fairly easy to explain oil’s plunge into a bear market.  In May, the Trump administration restored sanction on Iran, OPEC's 3rd-biggest producer, raising concerns about a supply squeeze in the oil market.  The following month, OPEC & a group of producers led by Russia abandnoned the 2016 agreement to restrict supply.  At the urging of Trump & oil customers, Saudi Arabia in particular turned on the ttaps, adding about 1M barrels per day to the market between Jun & Nov. But by Oct, forecasters were warning that demand for oil would grow more slowly than previously anticipated.  The same month, the stock market plunged.  Investors began dumping risk assets, & by the end of the month, oil had plunged about $11 a barrel from its Oct 3 high.  Momentum trading & the rotation out of slumping crude futures & into rising natural gas contracts also deepened losses for oil.  Making matters worse, when the sanctions officially snapped back into place on Iran on Nov 5, Pres Trump surprised the market by granting generous exemptions to the Islamic Republic's biggest customers.  That meant Saudi Arabia, Russia & several other producers had been hiking output into a market where demand growth was moderating & fewer Iranian barrels than expected were lost.  At year-end, the US-China trade dispute remains unresolved, & the market remains concerned that a full-blown trade war between the world's 2 biggest economies will dent fuel demand.  Meanwhile, American crude output is growing more quickly than expected, with the US topping Saudi Arabia & Russia to become the world's biggest producer in H2.

Oil prices just had their worst year since 2015 — here's what went wrong

This year will be long remembered in the stock & commodities markets.  The stock market rally, which seemed like it would never end, at least some though so, ended.  In 2018 the Dow dropped 1400 while NAZ fell more than 300.  Oil had a brutal year but gold & Treasuries, safe haven investments, finished in strong demand.  There are plenty of problems for investors to worry about & volatile trading is still in the cards.  Best wishes for all investors in 2019.

Dow Jones Industrials

Higher markets on optimism for a US-China trade deal

Dow jumped 178, advancers over decliners 4-3 & NAZ advanced 24.  The MLP index added 1+ to 221 & the REIT index was little changed.  Junk bond funds rose in price & Treasuries crawled higher.  Oil slid back to the 37s & gold was off 1 to 1281.

AMJ (Alerian MLP Index tracking fund)

CL=FCrude Oil45.45

GC=FGold   1,282.30
 -0.70 -0.1%

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Stocks opened higher, the last trading day of the year, as investors focused on evidence that trade talks between America & China are advancing.  Pres Trump & Xi Jinping talked via phone on Sun & expressed willingness to strike a trade deal afterwards.  Trump said "big progress" was being made on a potential trade deal.  Earlier this month, the 2 nations agreed on a 90-day ceasefire in the trade war that will begin Tues.  A spokesperson for China’s foreign ministry offered an upbeat statement about prospects for successful negotiations. "China stands ready to work with the United States to move forward the China-U.S. ties which are underpinned by coordination, cooperation and stability,” the spokesperson said.  In Asian markets, Hong Kong shares climbed over 1%, closing an otherwise bearish 2018 on a firm note.  In a shortened trading session, the Hang Seng index rose 1.3 %, but lost 13.6% of its value for the year, the worst decline since 2011.  Trading for the year in China & Japan ended Fri.  China's Shanghai Composite lost 24.6% for the year.  Japan's Nikkei declined 12% for the year its first annual decline since 2011.  In Europe, London's FTSE traded higher by 0.3% & France's CAC rose 1%.  Germany's DAX was closed, having ended the trading year on Fri losing 18% for the year.  On Fri, US closed out a wild week that saw stomach-churning gains & losses as investors weighed an array of concerns.  Major averages snapped a 3-week losing streak but remain down for the month.  While all 3 major averages, the Dow, S&P 500 & NAZ, were up for the week, they are all down more than 9% so far this month, which  has only one more trading day.

Stock investors focus on progress in US-China trade talks

US companies have sent home over ½T$s of cash they held overseas in 2018 to take advantage of tax changes, but data suggest the pace is slowing, potentially removing a key source of support for US stocks.  $ repatriation in the Jul-Sep period fell to $93B, around ½ of Q2 volumes & less than 1/3 of the $300B sent home in Q1, US current account data shows.  The repatriation bonanza followed new regulations that allowed the US gov to tax profits accumulated overseas, regardless of where the money was held.  Prior rules allowed companies to "defer" US tax on worldwide profits unless they repatriated the money.  The change offered a powerful incentive to bring home some of the $3T US firms were believed to hold in jurisdictions ranging from Ireland to Switzerland, either in cash or in securities such as Treasuries.  Because companies had probably already pre-booked a one-off tax hit for the year, repatriation will have dwindled further in the last qyr.  Ireland, which hosts the European hubs of US technology & pharmaceutical companies saw Treasury holdings drop $40B  between end-2017 & end-Oct 2018, falling by over 1/10 in Jan-Oct to $287.6B.

US companies repatriate more than half a trillion dollars in 2018

Activity in China's manufacturing sector contracted for the first time in more than 2 years in the month of Dec amid a domestic economic slowdown & Beijing's ongoing trade dispute with the US.  The Chinese National Bureau of Statistics said official manufacturing Purchasing Managers' Index (PMI) was 49.4, lower than the 49.9 expected.  The Dec reading was the weakest since Feb 2016.  That was worse than Nov's official manufacturing PMI, which was 50.0.  A reading above 50 indicates expansion, while a reading below that signals contraction.  In particular, new export orders contracted for a 7th straight month, with that measure falling to 46.6 from 47.0 in the previous month.  Meanwhile, China's official non-manufacturing PMI came in at 53.8, which was higher than the reading of 53.4 in Nov.  The services sector accounts for more than ½ of the Chinese economy.  Economic data is being closely watched for signs of damage inflicted by the ongoing trade war between DC & Beijing.  At the beginning of Dec, Pres Trump & Chinese Pres Xi Jinping agreed to a 90-day ceasefire that delayed the planned Jan 1 US increase of tariffs on $200B  worth of Chinese goods while they negotiate a trade deal.  On Sat, Trump said that he had a “long and very good call” with Xi & that a possible trade deal between the 2 countries was progressing well.  Yet beyond the tariffs battle, China's economy has been facing its own domestic headwinds.  Even before the escalation in trade tensions with the US this year, Beijing was already trying to manage a slowdown in its economy after 3 decades of breakneck growth.  Despite the tariff fight with the US over the last year, the Chinese manufacturing & export sectors held up well in 2018.  Analysts however, attributed the robustness to exporters pushing forward shipment dates, also called front-loading, a phenomenon that was expected to run out of steam, as freight rates indicated.  In Oct, China reported economic growth of 6.5% year-over-year in Q3, the weakest pace since Q1-2009 as the country's trade war with the US put pressure on growth.  China's official growth target this year is around 6.5%.

China’s manufacturing activity contracts even more than expected

The Brexit vote may have a major impact on whether or not the US & Britain can work out a trade deal.  If Parliament approves the Brexit proposal from Prime Minister Theresa May, the US ambassador to Britain has cast doubts on a major deal getting done.  Robert "Woody" Johnson said that negotiating a "quick" & "massive" trade deal between the 2 longtime allies "doesn't look like it would be possible" under the terms of May's proposed deal with the EU.  Johnson also used a radio appearance to reiterate Pres Trump's concerns about the proposed agreement, which faces strong opposition in Britain's Parliament.  May has said she plans to bring the plan to a vote in mid-Jan.  The US ambassador said he finds a "defeatism" in the British attitude toward Brexit that overlooks the many positive developments leaving the EU could bring.

US ambassador says major trade deal with UK may not be possible

Hope springs eternal on hopes for a US-China trade deal.  But that will require a lot more work.  Traders are closing out positions for their portfolios.  In the absence of major late day news stories, buying & selling in the closing hours today should not be meaningful.

Dow Jones Industrials

Friday, December 28, 2018

Market slide lower to conclude a week of wild price swings

Dow dropped 76 in another highly volatile day, advancers over decliners 3-2 & NAZ crawled up 5.  The MLP index was off fractionally to the 219s & the REIT index fluctuated in the 326s.  Junk bond funds edged higher & Treasuries crawled up in price, with the yield on the 10 year Treasury at 2.74%.  Oil climbed to the 45s & gold went up 1 to 1282 (more below).

AMJ (Alerian MLP Index tracking fund)

Live 24 hours gold chart [Kitco Inc.]

3 Stocks You Should Own Right Now - Click Here!

Pres Trump threatened to close the southern US border unless Congress agrees to provide $5B in taxpayer funds for a border wall with Mexico, blaming Dems for a partial gov shutdown that he previously said would be on him.  A dispute over funding for Trump's proposed wall has led to “non-essential” operations at numerous agencies being closed for lack of funding.  With Congress adjourned until next week there was no prospect of a quick resolution.  “We will be forced to close the Southern Border entirely if the Obstructionist Democrats do not give us the money to finish the Wall & also change the ridiculous immigration laws that our Country is saddled with,” Trump tweeted.  “Either we build (finish) the Wall or we close the Border,” he added.  The standoff over Trump's demand for money to help fund the border wall, estimated to cost about $23B in total, was in its 7th day & was widely expected to drag into Jan when Dems take control of the House.  Asked about Trump's border-closing threat, Mexican Pres Andres Manuel Lopez Obrador told reporters it was an internal US gov matter.  “We take great care of the relationship with the government of the United States,” Lopez Obrador said.  “Of course we will always defend our sovereignty ... We will always protect migrants, defend their human rights,” he added.  Earlier this month, Trump said he would be “proud” to shut down the gov over border security.  Today Trump aides blamed Dems for the continuing shutdown, contending that they have refused to negotiate since the White House made an offer last weekend.  “We’re here, and they know where to find us,” Mick Mulvaney, the White House chief of staff, said.  “Where is Chuck Schumer? Where is Nancy Pelosi? They’re not even talking right now,” he added. At present, the 2 sides remain far apart, Schumer's office said.  Dems have offered support for $1.3B in funding for general border security, but have long opposed the building of a wall.  If the stalemate persists, House Dems, led by Pelosi, plan to immediately offer a funding measure to re-open the gov when they take office on Jan 3.  Pelosi & Schumer have been discussing 3 general options for that legislation. The options are a stop-gap funding bill that would run thru Feb 8; 6 full 2019 appropriations bills for all but the Dept of Homeland Security, which would instead be funded thru a measure known as a continuing resolution maintaining current funding through Sep 30 or a continuing resolution for all shuttered gov agencies that would expire on Sep 30.  The legislation expected for a full House vote on Jan 3 could be a variation on any of the 3 options but added that no decision has been made.  The shutdown affects about 800K employees of the Depts of Homeland Security, Justice, Agriculture, Commerce & other agencies.  Most of the federal gov, which directly employs almost 4M, is unaffected.  Even agencies that are affected never totally close, with workers deemed “essential” still performing their duties.  Trump, who scrapped plans to spend Christmas in his Mar-a-Lago resort in Florida & stayed in DC due to the shutdown, had now also canceled his New Year's plans.

Trump threatens to close Mexico border, blames Democrats over shutdown

China's financial markets are safer after this year's stock market drop, a spokesman from the People's Bank of China (PBOC) said.  The local market is closed Mon & the Shanghai composite ended the year (today) at 2493 down nearly 25% for 2018 in its worst year since 2008.  The index hit a high of 3587 in Jan but tumbled as much as 31% from that level in Oct amid worries about an economic slowdown, a brewing trade war with the US & corporate financing issues.  “The extent of this drop is rather large,” said Zhou Xuedong, director general of the general exec office.  “But the market hasn’t seen major panic, (stock) dumping, or a large number of listed companies going bankrupt. This is a natural process of the market adjustment. The market participants have become relatively more mature.”  “After the stock market decline from 3,500 to 2,500, (with) valuations this low we are actually very safe,” Zhou added.  “The fewer bubbles there are, the safer we are. When stocks are safe, the overall banking industry is safer.”  Chinese authorities have made a flurry of announcements in the past several months in support of stocks & the economy.   Mainland trading is dominated by sentiment-driven retail investors rather than institutions, making market performance less tied to economic growth than stock indexes might be in other countries.  But as an indication of how much uncertainty hangs over China, the Shanghai composite has barely recovered from a near-4-year low hit in Oct & remains ½ the level it hit in 2015.  However, in contrast to heavy-handed market intervention during the summer market crash of 2015, gov handling of the latest stock market drop has been relatively subdued.  Authorities have encouraged private funds & local govs to establish investment funds to support companies struggling with a collateral system known as “share pledges.”  Last week, members of the Chinese State Council Financial Stability & Development Commission also said there should be implementation of market-oriented principles & reduction of administrative intervention in trading.  When Zhou and other representatives from the central bank were asked to expand on the statement, Zou Lan, deputy director-general of the financial market dept, gave the example of the PBOC's success in increasing financing for small- & medium-sized enterprises.  Overall, Zhou emphasized he is confident in China's financial stability & noted the larger banks are in good health.  The financial system goes thru a cycle roughly every 10 years, so it is about time that the risks which have built up should be exposed, he added.

China's stock drop this year reduces bubble worries, central bank official says

Gold futures closed slightly higher after a mixed session, leaving the haven metal at roughly 6-month highs & up 1.8% for the week.  Gold again tracked volatile stock trading & found support from a flagging $.  Gold for Feb delivery rose $1.90 (0.1%) at $1283 an ounce.  The contract's higher finish is its 4th in a row & marked the highest settlement since the 3rd week of Jun.  The SPDR Gold Shares ETF (GLD) was up 0.2% today.  The popular gold ETF rose more than 2% Wed, its best one-day percentage gain since Jul 2016, before drifting in the sessions since.  The ETF has gained roughly 8% since touching more than 2½-year lows in Oct.  Data from BullionVault, which calls itself the largest online market for physical precious metals, reveals the most robust demand since 2012, when the US & other major economies began to emerge from the global financial crisis.  The comparison is based on both the quantity of gold bought & for the number of new first-time investors in the metal, the company said.

Gold gains for fourth straight session as stocks chop in mixed action

Trying to make sense from the price swings this week is pointless.  Making any analysis more difficult is trading to adjust year-end positions.  The Dow has a range this week of 1700 in just 3½ days of trading.  It rallied 1300 off the depressed levels under 22K, but who knows what that means?  Demand for gold, the traditional safe haven investment, remains strong.  Try to have a good weekend & get ready for another volatile day on the last day of trading for 2018.

Dow Jones Industrials