Thursday, June 7, 2018

Mixed market after deal to end sanctions on ZTE

Dow went up 82, advancers over decliners 5-4 & NAZ fell 55.  The MLP index did little at 270 & the REIT index was off fractionally in the 344s.  Junk bond funds hardly budged & Treasuries were steady with the yield on the 10 year Treasury holding at 2.97%.  Oil recovered 1 to the 65s (more below) & gold was about even at 1301.

AMJ (Alerian MLP Index tracking fund)

CL=FCrude Oil65.38

GC=FGold    1,300.20
-1.20 -0.1%

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The US has reached a deal with Chinese telecom giant ZTE, but the company will have to pay up & make some major business changes, according to Commerce Secretary Wilbur Ross.  ZTE will pay a $1B fine & have to put $400M in escrow for violating sanctions, Ross said.  The penalties are in addition to the $892M in penalties ZTE already paid.  Ross called ZTE's actions a “world-class embarrassment,” & said that the US deal with ZTE imposes the “most strict” compliance ever on any company.  ZTE ceased major operations in Apr & a 7-year ban was imposed on the company for breaking a 2017 agreement by illegally shipping goods to Iran & North Korea.  The ban meant that ZTE could not purchase parts from US companies.  Ross also said that the company will have to replace its entire management & board of directors as part of the deal.  The changes will have to be made within 30 days.  ZTE will be on probation for 10 years & for 10 years the company will have to hire special compliance coordinators selected by & answerable to the US Bureau of Industry & Security within the Commerce Dept.  He said the ZTE deal should “serve as a very strong deterrent for other potential bad actors.”  Suppliers of parts & optical technology to smartphones rallied after the deal was announced.

China’s ZTE will pay $1B fine in deal with US

The number of Americans filing for unemployment benefits unexpectedly fell last week, pointing to a further tightening in labor market conditions.  The robust labor market & firming inflation have cemented expectations the Federal Reserve will raise interest rates next week.  Many economists believe the central bank will hike rates 2 more times after its Jun 12-13 policy meeting to prevent the economy from overheating.  The Fed lifted borrowing costs in Mar & forecast at least 2 more rate increases for this year.  Initial claims for state unemployment benefits decreased 1K to a seasonally adjusted 222K for the latest week, the Labor Dept said.  The forecast called for claims rising to 225K.  Prices of Treasuries held at lower levels after the data while the $ pared losses against a basket of currencies.  Stock were trading mixed.  The labor market is considered to be close to or at full employment.  Nonfarm payrolls increased by 223K jobs in May & the unemployment rate dropped to an 18-year low of 3.8%.  The jobless rate, which has declined by three-tenths of a percentage point this year, is now at a level where the Fed projected it would be by the end of this year.  Layoffs have remained very low amid signs of growing worker shortages across all sectors of the economy.  Data on Tues showed there were a record 6.7M job openings in Apr.  The number of unemployed people per vacancy slipped to 0.9 from 1.0 in Mar.  The 4-week moving average of initial claims, viewed as a better measure of labor market trends as it irons out week-to-week volatility, rose 2K to 225K last week.  The claims report also showed the number of people receiving benefits after an initial week of aid increased 21K to 1.74M in the latest week.   The 4-week moving average of continuing claims dropped 13K to 1.73M, the lowest level since 1973.

US weekly jobless claims drop as labor market gains steam

Oil prices rose on concerns about a plunge in exports from Venezuela, helping to lower the odds of another weekly loss for crude futures.  Brent crude futures were up 66¢ at $76.02 a barrel while West Texas Intermediate (WTI) crude was up 52¢ at $65.31 a barrel.  Venezuela, which faces the threat of US sanctions & is in the midst of an economic crisis, is nearly a month behind delivering crude to customers from its main oil export terminals, according to shipping data, & chronic delays & production declines could breach state-run PDVSA's supply contracts if backlogs are not cleared soon.  Tankers waiting to load more than 24M barrels of crude, almost as much as state producer PDVSA shipped in Apr, are sitting off the OPEC member's main oil port, according to shipping data.  Venezuela's supply problems have materialized while OPEC has voluntarily cut output since 2017 to help bring global output in line with demand.  The group, led by Saudi Arabia, has complied with its commitment to limit production, but not every member has cut voluntarily.  Aside from Venezuela, Angola has also seen output decline rapidly from its ageing fields.  The group meets in Vienna, together with top non-OPEC producer Russia, on Jun 22 to discuss its supply policy.

Oil rises as reality dawns over Venezuela's export crisis

Trading is quiet although NAZ has been sliding lower after the opening.  Tech stocks have had an exceptional rally in recent weeks & a pause period is easy to understand.  The Dow is rising above the important 25K, but dark clouds of trade talks have not gone away.  They should limit further gains for the stock market until more is understood about the future of intl trade.

Dow Jones Industrials

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