Wednesday, July 11, 2018

Lower markets as trade war heats up and oil prices sink

Dow dropped 219 (near session lows), decliners over advancers better than 2-1 & NAZ lost 42.  The MLP index fell 2+ to the 262s & the REIT index was fractionally lower to the 355s (still close to highs for this year).  Junk bond funds were a little lower & Treasuries rose in price.  Oil plunged more than 3, going below 71 (more below), & gold continued weak, tumbling 12 to 1241 to nearly a 1 year low.

AMJ (Alerian MLP Index tracking fund)

Live 24 hours gold chart [Kitco Inc.]

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The US is pursuing a new set of tariffs that would hit $200B in Chinese goods, according to senior administration officials.  The US Trade Representative said the 10% tariffs would target a variety of products imported from China, including clothing, baseball gloves, bicycles, refrigerators & seafood.  The additional tariffs, which will go thru a 2-month approval process including a public hearing, come after China retaliated in a tit-for-tat trade skirmish last week.  The US imposed an initial round of 25% tariffs, applying to $34B in imports, as part of a $50B tariff plan.  China responded with levies of its own, targeting $34B in US products such as pork & whiskey.  “As a result of China’s retaliation and failure to change its practices, the president has ordered USTR to begin the process of imposing tariffs of 10 percent on an additional $200 billion of Chinese imports,” US Trade Representative Robert Lighthizer said.  “This is an appropriate response under the authority of Section 301 to obtain the elimination of China’s harmful industrial policies.”

New tariffs would hit $200B in Chinese goods

During a meeting with members of NATO, Pres Trump said countries should increase defense spending to 4% of GDP – double the current target of 2%.  The pres made the remarks less a formal proposal, but while urging members to up their contributions & promote fair burden sharing across the organization.  “President Trump wants to see our allies share m(ore of the burden and at a very minimum meet their already stated obligations,” White House Press Secretary Sarah Sanders said.  The alliance set a goal in 2014 for each country to reach the 2% of GDP spending target by 2024.  While NATO members increased overall defense spending in 2017, for a 2nd consecutive year, the US was still largely outspending all other members.  The US spent more than 3.5% of its GDP on defense in 2017 (about $685B) according to a NATO report.  While that is down from more than $740B  in 2011, it’s still well above the outlay of all other members.  In 2017, the US is estimated to have spent more than 69% of the cumulative total.  In 2018, the US defense budget is $706B.  Meanwhile, NATO members in Europe contributed a total of $249.7B to their defense budgets & spent an average of 1.5% of GDP.  Canada only contributed 1.3% of its GDP, while Germany, which has drawn criticism from Pres Trump, spent 1.2% of its GDP on defense last year.  German Chancellor Angela Merkel has said her gov will increase spending to 1.5% of GDP by 2024.  Only 3 countries aside from the US. – Estonia, Greece & the UK – are currently spending above the NATO guideline of 2% on defense (& Poland's spending, however, was at 1.99% of GDP).

Trump ups NATO contribution target as allies lag on defense spending

After the White House's latest threat of tariffs on $B of Chinese goods, officials in Beijing are looking to “hit back in other ways.”  Yesterday, the Trump administration made good on recent threats to escalate a trade war with a list of 10% tariffs on $200B in Chinese goods.  That number exceeds the total value of items China imports from the US & since it cannot match $ for $, Chinese officials familiar with the plans said that China is looking into alternatives.  The possibilities include delaying approvals of mergers & acquisitions involving US companies, holding up licenses for US firms & “delaying and ramping up” inspections of American products at borders.  Yesterday, China's Commerce Ministry said it was “shocked” & in called the US actions “completely unacceptable.”  But China did not immediately or publicly say how it would retaliate other than complaining to the World Trade Organization.  The Foreign Ministry called the threats “typical bullying” & said Beijing would hit back with a counterattack.  The tariffs will not go into effect immediately & will undergo a 2-month review process with hearings in late Aug.  Some of the products on the list are part of "Made in China 2025" sectors, a strategic plan to make the Asian nation a leader in key global industries like technology.

China reportedly looks to ‘hit back in other ways’ in response to latest US tariffs

US wholesale inventories were a bit higher than initially estimated in May amid strong increases in the stocks of machinery & a range of other goods.  The Commerce Dept said wholesale inventories increased 0.6% instead of the 0.5% gain it reported last month.  Stocks at wholesalers edged up 0.1% in Apr & rose 5.9% year-on-year in May.  The component of wholesale inventories that goes into the calculation of GDP, wholesale stocks excluding autos, increased 0.8% in May.  Inventory investment was neutral to GDP growth in Q1.  The economy grew at a 2.0% annualized pace during the Jan-Mar period.  The pace of inventory accumulation is expected to pick up slightly in Q2.  A sharp slowdown in domestic demand in Q1 likely left businesses cautious about accumulating too much inventory.  Wholesale auto inventories fell 1.2% in May after increasing 0.2% in Apr.  Machinery inventories jumped 1.5% in May after rising 0.4% in Apr.  There were increases in wholesale stocks of professional & computer equipment as well as electrical equipment, metals, lumber, furniture & hardware.  Wholesale petroleum inventories stocks rose 2.7% in May after surging 4.0% in the prior month.  Sales at wholesalers accelerated 2.5% in May, the biggest increase since 2011, after rising 1.4% in Apr.  Sales of motor vehicles rebounded 2.9% after falling 0.4% in Apr.  At May's sales pace it would take wholesalers 1.24 months to clear shelves, the lowest since 2014, down from 1.27 months in Apr.

May wholesale inventories revised higher

Pfizer (PFE), a Dow stock, announced it would postpone drug price hikes after an "extensive" conversation between the company's CEO & Pres Trump.  "Pfizer shares the President’s concern for patients and commitment to providing affordable access to the medicines they need,” CEO Ian Read said.  The company said it would defer price increases, effective Jul 1, to give Trump "an opportunity to work on his blueprint to strengthen the healthcare system and provide more access for patients."  Drug prices will return to the levels they were prior to Jul 1 as soon as possible, according to the company.  The prices will remain at those lower levels until the end of the year, or until Trump's health-care plan goes into effect, whichever comes sooner.  Trump praised the decision on Twitter.  "We applaud Pfizer for this decision and desire other companies do the same," Trump tweeted.  The stock fell 21¢.
If you would like to learn more about PFE, click on this link:

Pfizer says it will postpone price increases after discussions with Trump 

Oil prices went into free fall in the PM, plunging on a raft of bearish news & posting their worst performance in over a year.  Crude futures briefly pared losses in AM trade after the US gov reported a huge 12.6M-barrel drop in crude stockpiles, but the market quickly shrugged off the weekly data.  Instead, traders were focused on supply concerns as Libya resolved a major disruption to its crude exports & Saudi Arabia reported a big jump in output for Jun.   Meanwhile, renewed trade tensions weighed on market sentiment.  Intl benchmark Brent crude tumbled $5.46 (6.9%) to $73.40, its worst performance since Feb 2016.  Oil prices fell along with stock markets & other commodities after the Trump administration threatened to slap tariffs on another $200B in Chinese goods.  The prospect of a worsening trade war has raised fears of slower global growth that could clip demand for oil.  China has also threatened to tax US crude imports.  The country has emerged as one of the biggest buyers of American oil since the US lifted a ban on crude exports in 2015.  "The increase in global trade has been a significant factor lifting world economic growth to higher levels in both 2017 and 2018," OPEC said.  "Hence, if trade tensions rise further, and given other uncertainties, it could weigh on business and consumer sentiment. This may then start to negatively impact investment, capital flows and consumer spending, with a subsequent negative effect on the global oil market."  Also, OPEC reported that its output increased in Jun, as the group's top producer pumped at its highest level since the end of 2016.  The group agreed last month to start easing production caps put in place in 2017 to drain a prolonged crude glut & lift prices.  US light crude ended the session down $3.73 (5%), at $70.38 a barrel, its biggest daily drop since Jun 2017.  Oil's price fall was aided by news Tripoli-based National Oil Corp (NOC) had lifted a force majeure on 4 Libyan oil ports, saying production & exports from the terminals would "return to normal levels in the next few hours."  Libyan oil production fell to 527K barrels per day (bpd) from a high of 1.28M bpd in Feb following the port closures, the NOC said.

US crude plunges 5% for its worst day in over a year

Today was the day of reckoning for the overbought market.  Selling in stocks came from worries about trade wars between the US & China (not to mention other countries) intensifying.  Oil is having a good year, but profits were taken today.  2018 is shaping up as a tough year for trade although the US economy has been doing well, at least so far.  The chart below shows the Dow continues to lumber along, above its 24K floor.  That's called being stuck in the mud.

Dow Jones Industrials

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