Thursday, May 24, 2018

Markets trim losses after assessing Trump's North Korea comments

Dow lost 75 (but above the lows), decliners slightly ahead of advances & NAZ slid back 1.  The MLP index lost 4+ to the 263s & the REIT index continued in the 334s.  Junk bond funds were about even & Treasuries remained a little higher on trade jitters.  Oil fell 1+ to go under 71 & gold added 15 to 1305 as Koran talks were cancelled (more on both below).

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PresTrump signed a bill to scale back some regulations put in place on banks in the wake of the financial crisis.  The bill is viewed as a big victory for small & mid-sized banks, which many experts believe have been unduly burdened by the Obama-era law, known as Dodd-Frank.  The pres had expressed his goal of having a relief bill passed by Memorial Day.  Today he told reporters that he wants to push more similar efforts with respect to regulation & thanked members of Congress for their hard work in getting this done.  Among the provisions that the bill will address is increasing the threshold, to $250B from $50B, for banks that are considered potentially “too big to fail,” & therefore subjected to a variety of tests and regulation – including annual stress tests.  It will simplify capital requirements for banks with less than $10B in assets, weakening regulations on trading & lending.  The bill will mark the first time since Dodd-Frank's passage in 2010 that members of Congress have agreed on reducing its reach.  Still, some believe efforts to roll back the law did not go far enough.  Rep House members have suggested they will seek to address some of the other provisions at a later date.

Dodd-Frank rollback ‘welcome news’ for small banks

Interest rate hikes could come to an end for this cycle in 2019, Philadelphia Fed Pres Patrick Harker said.  One of the more hawkish central bankers when it comes to monetary policy, Harker said he envisions a scenario where the Federal Reserve increases its benchmark overnight rate 3 times total in 2018 & 3 more times next year, then stops as the economy hits equilibrium.  "I think we're getting close to neutral," he said.  "If we see inflation start to accelerate, then I would be open to a fourth increase this year. But I'd have to see evidence of that first."  The policymaking FOMC, of which Harker is a nonvoting member this year, approved a qtr-point rate hike in Mar & is widely expected to add another in Jun & one more in Sep.  Whether the committee approves a 4th hike in Dec remains an open question, with traders currently assigning it a 39% chance.  Policy doves, who favor lower rates, seemed to get a boost yesterday, when minutes from the most recent FOMC meeting indicated that officials would be willing to let inflation run above the Fed's 2% target for a temporary period.  Harker said he, too, would consider that, though it would depend on conditions.  "I don't think of it so much as a number around 2 percent, although that's part of it," he said.  "It's the acceleration or deceleration. If we're creeping up to 2 percent and we creep up to, say, 2.25 percent, that's a different story than [if] we're accelerating past 2 percent. I think we'd behave differently. At least I would as a policymaker."

Fed could be finished hiking rates by 2019, Philadelphia's Harker says

Geopolitical turmoil & policy certainty are combining to make businesses more cautious about investing, Atlanta Fed Pres Raphael Bostic said.  With nuclear talks between the US & North Korea breaking down, the central bank leader said the development was "a surprise" & part of "downside risks" for the economy.  "Uncertainty has its own contribution," Bostic said.  "Then we actually have to ... figure out what the policy ends up being. If the policy turns out in certain ways, then business can go forward."  Markets reacted negatively to the AM news, with the Dow down about 200 & gov bond yields down substantially as well.  In a letter to Kim Jung Un, Trump said that recent rhetoric from North Korea made a summit impossible at this point.  Trump also announced posssible new tariffs on imported vehicles to the US even as Treasury Sec Steve Mnuchin earlier this week said a trade war with China had been averted at least for the moment.  "You're at the fork in the road, and there are multiple ways you can go," Bostic said.  "What I'm hearing from business is we're going to wait and we're going to see what happens, and I think that will offset some of the impact."  On other matters, Bostic said he thinks the Fed is getting close to the end of its rate-hiking cycle.  The neutral rate, he said, is probably around 2.25-2.75%, which would imply 3 to 5 more increases in the Fed's benchmark funds rate.  The comments came a day after the FOMC, of which Bostic is a voting member, released minutes from a meeting earlier this month that indicated officials are comfortable with letting inflation run a little hot for a short period as the economy grows.  "For me, I think we get to the neutral and we let the economy work," Bostic said.

North Korea summit cancellation part of 'downside risks' for the economy, Fed's Bostic says

Gold settled above 1300, for the first time in over a week after Pres Trump's decision to cancel the nuclear summit with North Korea fueled losses in the stock market, $ & Treasury yields, raising investor interest in the precious metal.  Jun gold rose $14.80 (1.2%) to settle at $1304 an ounce.

Gold prices settle above $1,300 for first time in over a week

Prices for US oil benchmark futures fell sharply, a day after a US gov report revealed a hefty weekly rise in domestic crude inventories.  Jul West Texas Intermediate crude fell $1.13 (1.6%) to settle at $70.71 a barrel (the lowest finish since May 11).  Prices have now declined for 3 sessions in a row.

U.S. oil benchmark prices end at a nearly 2-week low

Long-term US mortgage rates rose this week, continuing at their highest levels in 7 years amid the peak home buying season.  Mortgage buyer Freddie Mac said  the average rate on 30-year, fixed-rate mortgages was 4.66%, up from 4.61% last week.  Pushing toward the significant 5% level, the new average benchmark rate was the highest since May, 2011.  By contrast, the 30-year rate averaged 3.95% a year ago.  The average rate on 15-year, fixed-rate loans increased to 4.15% from 4.08% last week.  The average doesn't include extra fees (points) which most borrowers must pay to get the lowest rates.  The fees on 30-year & 15-year fixed-rate mortgages were both unchanged at 0.4%. The average rate for 5-year adjustable-rate mortgages rose to 3.87% from 3.82% last week & the fee remained at 0.3%.

US average mortgage rates at 7-year highs; 30-year 4.66 pct.

The North Korea news did not have a major affect on stocks.  Trade talks are more important for the future of the US & global economies.  And they are in limbo.  Dodd-Frank reform will give a lift to smaller banks as their regulations will be reduced.  The Dow is having a good month, up more than 600.  However that's due to a rally thru May 10.  Since then it has been flat, unable to crack thru 25K in a meaningful way due to trade talks stalling.

Dow Jones Industrials

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