Monday, June 18, 2018

Markets decline on trade tension worries

Dow sank 206, decliners barely ahead of advancers & NAZ lost 31.  The MLP index was off 1+ to the 263s & the REIT index fell 1 to the 341.  Junk bond funds slid lower & Treasuries were a tad higher.  Oil was even in the low 65s & gold went up 4 to 1282.

AMJ (Alerian MLP Index tracking fund)

CL=FCrude Oil65.40

GC=FGold  1,283.00

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Stocks fell to start the week after the US made good on plans to impose tariffs on $50B of Chinese goods.  As expected, China retaliated with a matching amount of tariffs on US goods & now concerns are percolating that the back & forth will lead to an all-out trade war.  Economic data due today include the National Association of Homebuilder's housing market index for Jun.  Meanwhile, incoming NY Fed President John Williams will speak later today at a conference focused on reforming behavior in financial services.  Commodities were mixed.

US stock market opens lower on trade war concerns

John Williams will assume his new role as head of the NY Fed today, after being appointed to the powerful post in early Apr.  As he takes over the 2nd most influential position within the US central banking system, Williams will be awarded a permanent seat, & vote, on the FOMC.  He has served as pres at the San Francisco branch since 2011, where he succeeded former Federal Reserve chair Janet Yellen.  Prior to 2011, Williams served as exec VP & director of research for the San Francisco Fed.  The Federal Reserve raised its benchmark interest by a qtr percentage point last week & is expected to raise rates 2 more times this year.  As the central bank brings interest rates closer to “neutral” levels, meaning they are neither accelerating nor slowing economic growth, Williams suggested in an interview this month that rates may even exceed neutral, which he defined around 2.5%, for a period of time.  “I don’t view our policy path as just getting to neutral and saying, ‘okay we’re done’” he added.  The Fed funds rate is currently in the 1.75%-2% range.

John Williams assumes influential role at most powerful regional Fed bank

US homebuilders are thrilled with demand for housing, but they are being hamstrung, they say, by rising costs for lumber.  Builder sentiment fell 2 points to 68 in Jun, according to the National Association of Home Builders/Wells Fargo Housing Market Index.  The index stood at 66 in Jun of 2017 & a reading above 50 is considered positive sentiment.  Builder sentiment has been in mostly in the 70s since last Dec, except for one dip in Apr, when mortgage rates took a sizeable jump.  This time the weakness is all about the spike in material prices.  "Builders are optimistic about housing market conditions as consumer demand continues to grow," said NAHB Chairman Randy Noel.   "However, builders are increasingly concerned that tariffs placed on Canadian lumber and other imported products are hurting housing affordability. Record-high lumber prices have added nearly $9,000 to the price of a new single-family home since January 2017."  Canadian lumber tariffs went into effect last year, but lumber prices continued to soar amid high demand from homebuilders as well as wildfires & a shortage of rail transportation.  Prices are up over 67% compared to a year ago & hit a record high in May, but fell back slightly in Jun as demand fell off.  Of the index's 3 components, each lost one point.  Current sales conditions fell to 75, the component gauging sales expectations in the next 6 months dropped to 76 & buyer traffic fell to 50.  Housing starts have been climbing slowly but not as much as the market needs.  There is a severe shortage of existing homes for sale & that is pushing home prices higher at a very fast pace, weakening affordability, especially at the entry level.  Homebuilders, faced with higher costs for land, labor & materials, are focused mostly on move-up & luxury home construction, as margins are squeezed at the entry level.  "Improved economic growth, continued job creation & solid housing demand should spur additional single-family construction in the months ahead," said NAHB Chief Economist Robert Dietz.  "However, builders do need access to lumber and other construction materials at reasonable costs in order to provide homes at competitive price points, particularly for the entry-level market where inventory is most needed."

Homebuilder sentiment drops in June due to soaring lumber costs

Bavaria's Christian Social Union (CSU) gave German Chancellor Angela Merkel 2 weeks to reach a European deal on migrants before they would demand immigration curbs that could fracture her governing coalition.  The CSU leadership agreed to delay until after a Jun 28-29 EU summit the introduction of an entry ban for refugees who have already registered in other EU countries, allowing Merkel time to reach a multilateral deal.  Merkel opposes any unilateral move by German Interior Minister Horst Seehofer, who is also CSU chairman, that would reverse her 2015 open-door policy on migrants & undermine her authority.  This compromise means he can introduce immediate expulsion for one subset ofmigrants.  "We wish the chancellor much luck," Seehofer said, announcing that he would nonetheless issue orders for people who have already been expelled to be turned back at the borders.  "This is not about winning time or anything like that but rather that in July, if there is no result at European level, we must implement this - that is a question for the functioning of our constitutional state," he added.  Merkel welcomed compromise in the dispute, which has threatened to destabilize a coalition cobbled together just 3 months ago & said her Christian Democrat (CDU) party would decide how to proceed after the 2-week deadline elapsed.  "After the European Council, the (CDU) party presidency will decide what to do next," she said.  "There is nothing automatic."   Merkel has insisted that an EU-wide settlement can be reached at a Jun 28-29 Brussels summit & says Seehofer's plan to turn away migrants who have previously been expelled would prejudice her chances of reaching that deal.

Trade tensions are increasing & there is little for the stock market to do other than watch developments.  The outlook is grim, not much else to say about it.  Meanwhile the US economy is doing well although new higher tariffs are scary when looking down the road.  The Dow went below 25K once again & may have to wait before seeing that level return.

Dow Jones Industrials

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