Thursday, February 8, 2018

Markets remain under pressure in choppy trading

Dow slumped 231, decliners over advancers 5-2 & NAZ lost 40.  The MLP index drifted lower in the 279s.  Junk bond funds crawled higher & Treasuries were sold again, bringing higher yields.  Oil fluctuated in the 61s & gold added 1 to 1315.

AMJ (Alerian MLP Index tracking fund)

CL=FCrude Oil61.77

GC=FGold   1,317.60

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Stock gauges in the US declined as Treasury yields surged higher, while equities in Europe & Asia still searched for footing after the global stock selloff.  The S&P 500 opened lower, weighed down by financial & industrial shares.  The Stoxx Europe 600 Index declined, as most country benchmarks in the region fell.  Earlier, shares in Japan closed higher after a turbulent session while China's stocks slid for a 3rd day, even as Hong Kong equities climbed.  US 10-year Treasuries dropped, pushing the yield to a 4-year high, as UK gilts sold off.  The Bank of England lifted its forecasts for economic growth & suggested it may need to raise interest rates faster than previously indicated, sending the £ higher.  The € fluctuated as ECB member Jens Weidmann said the central bank will monitor the impact of the currency on inflation.  Traders remain on edge after the resurgent threat of inflation & higher bond yields helped trigger a burst of volatility & a pullback across the overheated global equity market.  Against a backdrop of solid fundamentals, synchronized growth & strong corp earnings, investors would normally step in to buy the dip, but gov rates remain under pressure & this week's Treasury auctions have underwhelmed, raising the prospect that the debt selloff could resume.  Traders are also facing the prospect of Fed rate hikes, which could cool growth.  In Asia, the yuan earlier fell the most since the currency's devaluation in 2015 after China reported a much narrower-than-expected trade surplus as imports jumped.  The country has resumed its Qualified Domestic Limited Partnership plan after a 2-year halt, granting licenses to about a dozen global money managers that can raise funds in China for overseas investments.  Increasing imports & investment overseas both contribute to a weaker currency.  West Texas intermediate crude, which slid following a report showing record crude production from US fields, regained some ground.

U.S. Stocks Decline, Treasury Yields Push Higher

The Senate is poised to quickly pass a bipartisan budget deal today that would avert a gov shutdown & suspend the federal debt ceiling, but the bill faces less certain prospects in the House, where top Dem & GOP conservatives are raising objections.  Dem leader Nancy Pelosi, who emphasized her opposition with an unprecedented 8 hour address on the House floor yesterday, has vowed to reject the Bipartisan Budget Act of 2018 without a promise of an open immigration debate.  And some conservatives, particularly members of the House Freedom Caucus, oppose the deal because it calls for increased domestic spending.  The mood in the House was in stark contrast to the comity in the Senate, where Majority Leader Mitch McConnell & Democratic leader Chuck Schumer delivered laudatory back-to-back speeches on the accord, which would add nearly $300B for gov programs & suspend the debt ceiling until Mar 2019.  The bill, released overnight, authorizes the sale of 100M barrels from the Strategic Oil Reserve to pay for some of the new spending, & raises customs & airport security fees in the next decade.  It also renews a host of expired tax breaks for calendar 2017 including for nuclear power & cellulosic biofuel.  In the House, Pelosi sidestepped questions about whether she was pushing Dems to vote against the agreement, which would end a month-long impasse on gov spending priorities & head off a shutdown on Friday.  “I’m not whipping. I was on the floor all day,” Pelosi said after her marathon speech.  John Yarmuth, a Kentucky Dem & a ranking member of the Budget Committee, said Dem leaders were not demanding that members vote down the deal, making its passage more likely.  Although Reps have a 238 to 193 majority in the House, the Freedom Caucus, which numbers about 3 dozen Reps, announced they would oppose the accord.  Pres Trump backed the deal, giving cover to Reps concerned about adding to the budget deficit in an election year, but House Speaker Paul Ryan still may need some Dem votes to get it passed.  Ryan was confident an hour ago when he said that “I think we will” have the votes to pass the budget bill.

Budget Deal Hits Turbulence in House

Federal Reserve Bank of Dallas Pres Robert Kaplan said the recent financial market upheavals may actually be beneficial & he doesn't expect them to have a negative impact on the economy.  “More volatility in the markets, and maybe addressing some of the excesses and imbalances in the markets, by having a little more volatility, may be a healthy thing,” he said, adding that the preceding months of smooth sailing were “historically unusual.”   Treasury yields have risen & stock markets plunged at least in part due to investors' concern that the Fed may pursue additional rate increases this year as inflation finally picks up toward the central bank's 2% goal.  The VIX index, which uses derivatives to track expected volatility in Us stocks, has spiked in recent days after months of calm, causing substantial losses for investors who had been making returns betting against its rise.  Kaplan does not vote on monetary policy this year.  He has been growing increasingly confident in the economic outlook in recent months, saying last week that he now feels more firmly that 3 rate hikes will be appropriate in 2018, though 6 months ago he might have said 2-3.  “I’ll be watching carefully to make sure it does not transmit, though, to tighter financial conditions or spillover to the economy,” he also said.  “But at this point, I’d be optimistic that it won’t.”

Fed’s Kaplan Says Market Volatility ‘May Be a Healthy Thing’

With elevated volatility, these are not times for the timid.  Adding to the confusion, funding for the gov has too be extended by tonight or there will be another gov shutdown.  Nobody has a clue where this will go.  The bull market days are over (shown in the chart below) & investors must adjust to big swings.  At the same time, investors have not been buying gold.  Investors do not know how to play kind of market!!

Dow Jones Industrials

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