Friday, January 19, 2018

Markets sputter ahead of a looming goverment shutdown

Dow was off 8, advancers over decliners 3-2 & NAZ rose 21.  The MLP index was fractionally lower in the 293s.  Junk bond funds fluctuated & Treasuries continued to be sold.  Oil slid lower in the 63s & gold gained 7 to 1334.

AMJ (Alerian MLP Index tracking fund)

CL=FCrude Oil63.50

GC=FGold  1,335.00

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Stocks added to records on a report that regulators are close to further easing banking rules, while the gov shutdown drama weighed on the $.  Treasury yields climbed to a more than 3-year high & most major equity gauges were higher.  The greenback headed for a 6th straight weekly losses before temporary US gov funding runs out tonight.  And the yield on 10-year Treasuries rose above 2.64% for the first time since 2014.  The moves dominated global markets, with the €, ¥, gold & precious metals among the beneficiaries of $ weakness.  The risk-on mood that helped drive up Treasury yields this week was still evident, with European stocks following Asian peers higher.  Emerging-market equities climbed for a 6th day & West Texas crude extended a retreat.  Optimism about global growth finally seems to be catching up with bond markets, with investors factoring in the prospect of accelerating price increases in the US.  Yesterday's sale of US bonds that offer a hedge against faster inflation attracted strong demand.  Better-than-expected growth numbers from China this week added to a slew of recent data releases from across the world supporting the positive outlook, days before 2 of the big central banks rule on rates.  Spanish bonds rose & outperformed their peers in Europe, driving the yield premium on 10-year debt to the lowest level since before the euro crisis, as investors position for a possible credit-rating upgrade today.

Stocks Rise, Dollar Hits Weakest Level in 3 Years: Markets Wrap

Consumer sentiment unexpectedly declined in Jan to a 6-month low as American households viewed the economy less favorably, a Univ of Mich report showed.  The sentiment index dropped to 94.4 (est 97) from 95.9 in Dec.  Current conditions gauge, which measures perceptions of their finances, decreased to 109.2, the lowest since Nov 2016, from 113.8.  The expectations measure improved to 84.8 from 84.3 & year-ahead inflation climbed to 2.8%, the highest since Apr 2016, from 2.7%.  The decline in sentiment included a decrease in a measure of buying conditions for big-ticket goods, indicating consumer spending may slow early this year after a solid holiday-shopping season.  The setback in purchasing conditions was mainly due to less- attractive pricing.  That was reflected in a pickup in increases in expected inflation rates over the coming year & longer term.  At the same time, the expectations index remained stable, with 70% of respondents saying they thought the impact of the tax reform act will be positive.  The survey also showed lingering strength in personal finances.  Improved finances were reported by ½ of all respondents, matching the 2017 average which was the best in 17 years.  “The disconnect between the future outlook assessment and the largely positive view of the tax reform is due to uncertainties about the delayed impact of the tax reforms on the consumers,” Richard Curtin, director of the consumer survey, said.  “While long-term inflation expectations remained at its 2017 average level and short term inflation expectation inched upward, consumers continued to remain very optimistic about the low national unemployment rate,” Curtin added.

U.S. Consumer Sentiment Unexpectedly Falls to a Six-Month Low

OPEC's fear that another surge of shale oil could neutralize its production cuts might be coming true.  US oil output is set for “explosive” growth this year as prices rally, the International Energy Agency (IEA) said.  As OPEC & allies including Russia gather in Oman this weekend, achievements including a 3-year high in oil prices & rapidly dwindling supply glut may be overshadowed by the risk of becoming victims of their own success.  Non-OPEC oil output growth in 2018 is comparable with the best years of US shale boom.  “The big 2018 supply story is unfolding fast in the Americas” the IEA said in its monthly report.  “Explosive growth in the U.S. and substantial gains in Canada and Brazil will far outweigh potentially steep declines in Venezuela and Mexico.”  Even with the moderate price response to the OPEC-led cuts during most of 2017, rival suppliers still managed to bounce back with output growth of 700K barrels a day, the IEA said.  As producers react to the recent surge in Brent crude above $70 a barrel, the agency expects non-OPEC supply to expand by 1.7M this year, the biggest jump since the peak of the shale boom.  That would deliver an unsatisfying outcome for OPEC & its allies in 2018.  Rival suppliers would be handed the entire 1.3M barrel-a-day expansion in the global oil market this year & US crude output could overtake that of Saudi Arabia & even get close to Russia.  To make matters worse, another year of production cuts would have little effect on oil inventories which the agency says are still 90M barrels above OPEC's target.  While the US gains, there are others that are still suffering.  The IEA expects Venezuela's troubles to worsen after its 2017 production fell to the lowest in nearly 30 years.  “Given Venezuela’s astonishing debt and deteriorating oil network, it is possible that declines this year will be even steeper than the 270,000 barrels a day in 2017,” the report said.  Yet, the IEA doesn't see a “clear sign yet of OPEC turning up the taps to cool down oil’s rally” or “compensate for a precipitous drop in supply from Venezuela.”

IEA Sees ‘Explosive’ Growth in U.S. Oil Output as Prices Rally

2 Dow stocks were under selling pressure.  IBM (IBM) sank over 6 today after its earnings report & General Electric (GE) continued to be sold, down 15% in the last week.  The very real threat of a gov shutdown is not helping matters.  This is a time for profit taking & there are plenty of profits to choose from.  The DC chaos will likely go down to the midnight deadline, if not later.  Brilliant analysis currently will have no meaning.  Longer term, the stock rally remains impressive.

Dow Jones Industrials

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