Tuesday, May 29, 2018

Markets tumble, led by selling in bank stocks

Dow sank 391 (finishing near the lows), decliners over advancers about 3-2 & NAZ dropped 37.  The MLP index was about even in the 261s & the REIT index added 1+ to the 335s despite selling in many stocks.  Junk bond funds were slightly lower & Treasuries rallied, following unsettled conditions in Italy, taking the 10 year Treasury yield down a whopping 16 basis points to 2.77%.  Oil pulled back more than 1 to the 66s to a 6 week low (more below) & gold fell 2 to 1301.

AMJ (Alerian MLP Index tracking fund)

Live 24 hours gold chart [Kitco Inc.]

3 Stocks You Should Own Right Now - Click Here!

Stocks accelerated their losses, with the Dow, at its low point, dropping more than 400 points.  Sparking the sell-off was the political crisis in Italy. Italian Pres Sergio Mattarella decided yesterday to block the formation of a euroskeptic gov, reviving longstanding worries about a political crisis in Italy & the broader stability of the Eurozone.  The Dow fell on Fri as a decline in oil & concern over a scuttled summit with North Korea made investors wary on the eve of the 3-day Memorial Day weekend.  Despite geopolitical tensions, the major averages closed the week in positive territory.  Financial shares led the decline, with insurers, diversified financials & banks under pressure.  Falling Treasury yields are also a headwind after the yield on the 10-year note fell to the lowest since Apr 12.  The S&P financial sector is on pace for its biggest loss in 2 months.  Oil futures were sharply lower as traders digested the potential for Saudi Arabia & Russia to boost oil output.  The Conference Board's  consumer confidence index rose to 128 in May from a revised 125.6 in Apr.  A measure of current conditions, the present situation index, hit a 17-year high of 161.7 up from 157.5 in the prior month.  Oil futures were sharply lower as traders digested the potential for Saudi Arabia & Russia to boost oil output.

Dow plunges more than 400 on Italy turmoil

The Trump administration has renewed its threat to place 25% tariffs on $50B of Chinese goods in retaliation for what it says are China's unfair trade practices.  The White House also said that it would place new restrictions on Chinese investment into the US & limit US exports of high-tech goods to China.  The threats come just over a week after trade tensions between the world's 2 largest economies had eased, with Treasury Sec Steve Mnuchin saying May 20 that the trade conflict was "on hold."  Mnuchin's comments followed a commitment by China to significantly increase its purchases of US farm goods & energy products, such as natural gas.  Commerce Sec Wilbur Ross is scheduled to visit China on Sat to negotiate the details of that agreement.  Some trade experts said the tariff announcement is likely intended to strengthen Ross's hand.  Other analysts, however, say the newly confrontational stance may be intended to appease congressional critics of a deal the administration made Fri that allowed Chinese telecom giant ZTE to stay in business.  The tariff threat is unlikely to derail ongoing talks, they said.  China's Ministry of Commerce responded in a mild fashion today.  The Ministry said the White House announcement "is contrary to the consensus the two sides have previously reached," according to China's official news agency, Xinhua.  The statement did not reiterate China's own previous threats to impose $50B in retaliatory tariffs on US goods.  Members of both parties in the House & Senate slammed the agreement the administration reached with ZTE Fri, in which the Chinese firm agreed to remove its management team, hire American compliance officers & pay a fine.  The fine would be on top of a $1B penalty ZTE has already paid for selling high-tech equipment to North Korea & Iran in violation of US sanctions.  In return, the Commerce Dept lifted a 7-year ban on ZTE's purchase of US components that it had just imposed earlier in May.  China had complained strongly that the ban would put ZTE out of business, costing 70K jobs.  Trump tweeted last month that the ban threatened to many Chinese jobs & he wanted to get the company "back in business, fast."

Trump renews tariff threat, complicated upcoming talks

Political uncertainty in Italy has unhinged world markets, raising the specter of a € crisis that could ripple across the global economy & even force the Federal Reserve to slow its rate hiking plans.  Several strategists say there is little chance the euro zone's 3rd largest economy will move to leave the single currency, creating a continent-wide crisis of confidence.  But internal chaos & a new election could make for a rocky summer for markets & even put a dent in European economic growth.  Italy moved to the foreground as the latest source of angst for markets, after a weekend of drama where Pres Sergio Mattarella Sun blocked the formation of a gov that would have been decidedly against the €.  The anti-establishment 5 star Movement, Italy's biggest party, & the far-right League party picked euro-critic Paolo Savona as their economy minister.  The 2 parties, both critical of Europe's single currency, had won more than ½ the votes in Mar parliamentary elections.  Mattarella vetoed the choice & instead asked Carlo Cottarelli, a former IMF official to form a temporary gov, but both parties object to him & a new vote is now expected in late Jul.  The € sank, losing 0.7% today to $1.154, & investors dumped Italian bonds while seeking safety in US Treasuries & German bunds.  The 2-year Italian yield briefly snapped above 2.73%, a sharp move from just 0.48% on Fri & a negative yield earlier this month.  Global equity markets slumped, with the Dow tumbling more than 450.  Banks led the selloff, & the S&P financial sector declined more than 3%.  In Europe, yields on Italian bank debt spiked as bank shares sold off.

Here's why markets are so scared of the latest Italian political drama

The White House said Pres Donald Trump's summit with North Korean leader Kim Jong Un is still "expected" to happen in Singapore, just 5 days after Trump stunned the world by canceling it.  "The United States continues to actively prepare for President Trump's expected summit with leader Kim in Singapore," White House press secretary Sarah Huckabee Sanders said.  Trump wrote Kim last week, accusing his gov of "tremendous anger and open hostility" in recent statements about the US.  He also hinted at a possible nuclear showdown: "You talk about your nuclear capabilities, but ours are so massive and powerful that I pray to God they will never have to be used."  But it appeared today that the situation had rapidly swung back the other way.  Sanders also said today that Sec of State Mike Pompeo would meet later this week with top Kim Jong Un aide Kim Yong Chol, who is traveling to NY.  Kim Yong Chol is a former spy chief for the communist dictatorship & has been actively involved in talks between North & South Korea.  Here are other details about summit preparation released by the White House:
  • A US delegation continues to meet with North Korean officials in the demilitarized zone between North & South Korea.  The American delegation consists of Sung Kim, US ambassador to the Philippines; Allison Hooker, director for Korea at the National Security Council; & Randy Schriver, assistant secretary of Defense for Asian and Pacific security affairs at the Dept of Defense.
  • Deputy White House chief of staff Joe Hagin is in Singapore with a pre-advance team "coordinating the logistics of the expected summit."
  • National security advisor John Bolton, a North Korea hard-liner, has been speaking with counterparts in Japan & South Korea "virtually every day."   

White House says Singapore summit with Kim Jong Un is 'expected,' just days after Trump canceled it

American consumers were feeling more a bit more optimistic in May following a slight decline in confidence in Apr.  The May reading matched another estimate at 128, an increase from 125.6 in Apr.  Consumers' assessment of current conditions improved, showing better attitudes toward business conditions.  This follows 127 reported in Mar & 130 in Feb's 130.0, the highest reading in 18 years.  "Consumers' assessment of current conditions increased to a 17-year high, suggesting that the level of economic growth in Q2 is likely to have improved from Q1," said Lynn Franco, Director of Economic Indicators at The Conference Board.  Consumers were slightly positive about the short-term outlook in May despite a small decline in the percentage of consumers anticipating improvements in business conditions over the next 6 months.  The outlook for the labor market was mixed, as the percentage of consumers expecting improved short-term income prospects declined.  The Commerce Dept reported that US retail sales in Apr increased at a 0.3% rate, a sign that consumers may be back after weak spending earlier this year.  "Overall, confidence levels remain at historically strong levels and should continue to support solid consumer spending in the near-term," Franco said.  The index measures American's sentiment on current economic conditions & expectations for the next 6 months.  Consumer spending accounts for about 70% of US economic activity, drawing attention to the numbers.

Consumer confidence bounces back in May, remains at 'historically strong levels'

US crude oil fell sharply again, tacking on more losses as the market sold off ahead of an OPEC meeting that could see major producers lift output caps that have been in place since Jan 2017.  Saudi Arabia & Russia, 2 of the world's top 3 producers, have recently signaled that OPEC & its allies could decide at a Jun 22 in Vienna to begin exiting their supply cutting agreement.  The prospect of lost exports from Iran in the face of renewed US sanctions & falling output in crisis-afflicted Venezuela is coaxing the producers to start winding down the historic deal.  West Texas Intermediate crude futures fell as much as 3% today, posting a 5th straight day of losses after hitting a 3½-year high last week.  The contract ended the session down $1.15 (1.7%) at $66.73 a barrel.  WTI, which did not trade during the Memorial Day holiday, is down 7.6 % since settling at $72.24 one week ago, its highest closing level since Nov 2014.  Meanwhile, Brent crude futures stabilized, rising 12¢ to $75.42.  The intl benchmark for oil prices tumbled 5.6% over the last 3 sessions, slipping further from a 3½-year high at $80.50.  2 dozen oil producers, including Russia & the 14-member oil cartel OPEC, have been keeping 1.8M barrels a day off the market since Jan 2017 in order to drain a glut that tanked oil prices in 2014.  But the oil market is now in danger of overheating amid geopolitical tension & traders are keenly focused on how much oil OPEC agrees to restore next month in Vienna.  

US crude tumbles 1.7%, settling at $66.73, as OPEC looks poised to ease output caps

While stocks had a brutal day, selling was somewhat confined, with much of it in financials.  Meanwhile Treasuries had a eye-popping rally, with money flowing out of Italy into safe haven Treasuries.  The 3 biggest losers in the Dow were financials: JPMorgan (JPM), American Express (AXP) & Goldman Sachs (GS).  Each one was off more than 3%.  Market breadth was not substantial & there was a little bit of buying into the close.  But this still ranks an one ugly day & the bulls have their ongoing challenge to convince investors to buy.

Dow Jones Industrials

No comments: