Tuesday, June 19, 2018

Markets decline led by a triple digit loss for the Dow

Dow dropped 287, decliners over advances a relatively mild 4-3 & NAZ fell 21.  The MLP index was off 1+ to the 264s & the REIT index slid lower in the 342s.  Junk bond funds were mixed & Treasuries went up, taking the yield on the 10 year Treasury down 3 basis points to 2.89%.  Oil declined to 65 (more below) & gold slid back 2 to 1277.

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US stocks may be getting slammed by the latest trade tensions, but equities in China are faring far worse.  China's benchmark Shanghai Composite Index tumbled 4% to a 2-year low on today & has fallen 7 of the past 8 trading days.  The country's benchmark index is now below 3K & down 18.3% from its recent closing high, putting it very close to a 20% drop that would signal a bear market.  By comparison, the Dow was down triple digits today, but for the year it's little changed.  Meanwhile the S&P 500 is about 3% higher for the year.  Global markets are volatile as the prospects for a trade war have intensified.  Yesterday Trump threatened to hit another $200B worth of Chinese products with tariffs.  This after he slapped tariffs on $50B worth of  goods last Fri.  China retaliated Fri & then yesterday causing more upheaval in the global markets.  Peter Navarro, a White House trade adviser today said, “China has more to lose going forward. China sent us $505 billion in goods last year. We sent $130 billion. They feel the numbers are on their side.”  Adding more uncertainty, China is in the midst of a regulatory push to reduce risks in its financial system.  China has been trying to reduce its debt & that has some concerned that growth will falter, making right now a bad time for a stock market correction.  The country has a history of embarking on massive stimulus programs to spur economic growth, particularly when there have been signs of an impending slowdown.  The People's Bank of China governor Zhou Xiaochuan said in Mar that they would move away from this old growth model & would rely less on stimulus to boost the economy in the future.  Now Beijing is looking at becoming more cautious about spending to reduce the risks from a rapid build-up in debt.

China bearing the brunt of trade tensions

Global oil demand is set to stay strong in H2, an OPEC technical panel forecast this week, suggesting the market could absorb extra production from the group.  OPEC meets on Fri to decide on output policy amid calls from major consumers such as the US & China to cool down oil prices & therefore support the global economy by producing more crude.  OPEC's de facto leader, Saudi Arabia & non-member Russia have proposed relaxing production cuts gradually, while OPEC members Iran, Iraq, Venezuela & Algeria have opposed such a move.  3 sources at OPEC on a technical OPEC panel - OPEC's economic commission - met on to review the market outlook & present it to the ministers later in the week.  "If OPEC and its allies continue to produce at May levels then the market could be in deficit for the next six months," one source said.  A 2nd source said: "The market outlook in the second half is strong."  Some countries including Algeria, Iran & Venezuela said at the meeting that they still opposed an oil output increase, one source said.

OPEC sees strong oil market, possible need for more output

Oil prices fell as an escalating trade dispute between the US & China triggered sharp sell-offs in many global markets.  Crude was also weighed down by expectations that producer cartel OPEC & key ally Russia will gradually increase output.  The US & China are threatening punitive tariffs on each other's exports, which could include oil supplies, resulting in stock market sell-offs.  Brent crude futures were at $74.70 per barrel, down 64¢ (0.9%), from their last close.  West Texas Intermediate (WTI) crude futures were at $65.28 a barrel, down 57¢ (0.9%).  Oil traders are closely watching a threat by China to react to US tariffs by putting a 25% duty on US crude oil imports, which have been surging since 2017 to a value of almost $1B per month.  OPEC together with a group of non-OPEC producers including Russia started withholding oil supplies in 2017 to prop up prices.  Following a sharp increase in crude prices from their sub-$30 per barrel lows in 2016, the group on Fri will meet in Vienna, Austria, to discuss forward policy.

Oil falls on escalating U.S.-China trade spat

The real loss for stocks today was less severe than the gloomy decline implies.  Tech stocks held up reasonably well & market breadth was only mildly negative.  While there were only 8 gainers in the Dow, much of its decline was concentrated in 4 stocks.  Boeing (BA) & Caterpillar (CAT) were off about 4% each, & DowDuPont (DD) & 3M (MMM) were each off 2+%.  Of course they have a lot of business related to the higher tariffs proposed by the US, China & other allies.  Trade war fears are bringing on the selling but it has been somewhat selective.  As growing uncertainty about more retaliation persists, selling will be less selective & spread.  On the optimistic side, the Dow finished about 130 above session lows.

Dow Jones Industrials

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