Monday, July 2, 2018

Markets close higher in choppy trading on trade war fears

Dow was up 35 (finishing more than 200 above the lows), advancers over decliners about 5-4 & NAZ went up 49.  The MLP index fell 2+ to 261 & the REIT index dropped 2 to 351.  Junk bond funds slid back a tad & Treasuries experienced some selling.  Oil fell below 74 (more below) & gold sank 11 to 1243 to nearly a 1 year low.

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American factory activity accelerated for the 2nd straight month in Jun, signaling momentum in the US manufacturing sector.   The Institute for Supply Management said its manufacturing index rose to 60.2 in Jun from 58.7 in May.  Numbers above 50 indicate activity is expanding across the manufacturing sector, while numbers below 50 signal contraction.  The forecast called for a 58.1 reading for Jun.  The index in Feb hit 60.8, its highest level since 2004, before easing in March & Apr.  It picked up in May & again in Jun.  Broader economic growth appeared to pick up in the just-completed Q2 after a modest slowdown in the early months of 2018.  The unemployment rate declined below 4% this spring & forecasters expect solid growth this year, supported by recent tax cuts & strong consumer sentiment.

U.S. manufacturing surged in June

Pres Trump is predicting a positive relationship with Mexican Pres-elect Andres Manuel Lopez Obrador.  Trump says he "had a lot of good conversation" with the leftist leader today for about 30 minutes, a day after Lopez Obrador's victory.  Trump says "I think the relationship will be a very good one."  Speaking during a meeting with Dutch Prime Minister Mark Rutte, Trump says he & Lopez Obrador discussed border security & trade.  He says: "We talked about trade, we talked about NAFTA, we talked about a separate deal, just Mexico and the United States."  Trump said this weekend that he was delaying efforts to renegotiate NAFTA until after the Nov midterm elections.  US Secretary-General Antonio Guterres has congratulated Mexico on its election.  US deputy spokesman Farhan Haq said today the secretary-general "congratulates the people of Mexico for the civic exercise of participation in the largest elections that the country has celebrated."  Haq said the UN chief "expresses the readiness of the United Nations to work with the new administration continuing a longstanding tradition of excellent cooperation between Mexico and the United Nations."  Mexican bank Banorte expects the party led by Pres-elect Andres Manuel Lopez Obrador to have a majority in both houses of Mexico's Congress, but says it's not likely to get the 2/3 advantage needed to change the constitution.  A bank analysis also says it expects the leftist to maintain solid economic fundamentals, with responsible fiscal policy & respect for the autonomy of the Mexican central bank.  Lopez Obrador has repeatedly promised just that, though some businesspeople have been skeptical.

The Latest: Trump sees 'good' ties with Mexico's new leader

Spending on US construction projects edged up 0.4% in May, while Apr's figure was revised down significantly, signs that new building is still uneven despite a growing economy.  The uptick in May brought total construction spending to a seasonally adjusted all-time high of $1.31T, 4.5% higher than a year ago, the Commerce Dept said.  The Apr figure was revised down to 0.9% from what was originally reported as 1.8% gain, which would have been the largest increase in 24 years.  That came on the heels of 0.9% drop in Mar, the first monthly drop since Jul 2017.  Total private construction rose 0.3%, with residential projects up 0.8% in May.  New single-family home construction rose 0.6% & the volatile apartment building sector jumped 1.6%.  Private, non-residential building fell 0.3%.  Economists are forecasting that construction spending will contribute to overall growth this year even though interest rates are rising.  A lack of inventory has stymied homebuyers & pushed home prices higher as demand for existing & new homes has surged.  Last month the Commerce Dept reported that housing starts rose to a seasonally adjusted annual rate of 1.35M, the strongest pace since 2007, thanks to a surge of building in the Midwest.  Even as gov budgets have tightened, construction of public projects in May rose 0.7%  to $304B, the highest since 2010.  That gain was fueled by a 0.6% rise in state & local construction, which accounts for more than 90% of total gov activity.  State & local gov construction spending was $282B, the most since 2009.  Spending on the power grid increased nearly 11% on a monthly basis & is up more than 25% over a year ago.

US construction spending rose 0.4 percent in May

Commerce Secretary Wilbur Ross said that there's no level on the downside in the stock market that would alter the way Pres Trump approaches trade.  "There's no bright line level of the stock market that's going to change policy," Ross said.  "The president is trying to fix long-term problems that should have been fixed a long time ago."  Stock started off Q3 under pressure on concerns about import tariffs imposed & threatened by Trump were again bringing out the sellers.  The Dow last week, for the month of Jun & for the year was lower as of the Fri close.  However, the index was nearly ¾ of a percent higher in Q2.  "There is obviously going to be some pulling and tugging as we try to deal with very serious problems," he added.  "There will be some hiccups long the way."  Ross said the Trump administration would never announce a stock market level for pulling back on trade even if there was one, which he stressed there's not.  "You can't deal with day-to-day stock market fluctuations," he said, adding that policy measures need to be crafted & pursued based on what's fundamentally good for the economy.  The White House is attacking what it sees as unfair trade on a number of fronts, including tariffs on steel & aluminum imports that have been met with retaliatory measures from the EU, Canada, Mexico & China.  But Ross said it's "premature" to say whether Trump's threatened tariffs on European auto imports would come to pass.  If those auto tariffs were imposed, the US could see a new round of retaliatory tariffs worth as much as $300B.  Ross also said the administration has drafted a bill to allow it to unilaterally raise tariffs without congressional consent, which would be acting outside World Trade Organization rules.  He didn't directly address that report, but said, "We've made no secret of our view that there are some reforms needed at the WTO."  In addition to those steel & aluminum tariffs, the administration's threatened China tariffs that were announced last month were set to go into effect on Fri.  If that happens, China has promised tariffs on the US.

Trump isn't going to change his mind on trade even if the stock market keeps falling: Wilbur Ross

Global benchmark Brent crude fell as supplies from Saudi Arabia & Russia rose while economic growth stumbled in Asia amid escalating trade disputes with the US.  Benchmark Brent crude oil fell $1.93 a barrel (2.4%) to $77.30 & US light crude ended the session 21¢ lower at $73.94.  A flurry of announcements over the weekend unsettled oil markets.  Pres Trump tweeted on Sat that Saudi Arabia's King Salman bin Abdulaziz Al Saud had agreed to pump more oil, "maybe up to 2,000,000 barrels."  The White House later walked back on the comments.  Saudi Arabia's output is up by 700K barrels per day (bpd) from May & close to its 10.72M bpd record from Nov 2016.  Production from OPEC increased by 320K bpd in Jun, according to a survey.  The 12 OPEC members with supply reduction targets increased output by 680K bpd compared to May.  Russian output rose to 11.06M bpd in Jun from 10.97M bpd in May, the Energy Ministry said.  US production has soared 30% in the past 2 years, to 10.9M bpd, meaning the world's 3 biggest oil producers now churn out almost 11M bpd each, meeting 1/3 of global oil demand.  Also weighing on oil demand are trade disputes between the US & other major economies including China, the EU, India & Canada.  Despite the relief from Saudi Arabia & Russia, oil markets remain tense because of unplanned outages from Canada to Venezuela & Libya.  Looming US sanctions against Iran further contribute to expected tightness.  US crude hit a 3½-year high last week after the Trump administration said it is pushing oil buyers to completely cut off imports from Iran by Nov.  Trump threatened to put sanctions on European companies that do business with Iran.  Trump's Nov 4 deadline to end Iranian crude purchases comes just 2 days before most Americans vote in midterm elections.  The policy threatens to wipe out much of the gasoline price relief that US drivers usually get in the fall.

US crude dips 21 cents, settling at $73.94, as OPEC and Russian output rises

Pres Trump is warning the World Trade Organization that if the US isn't treated "properly, we will be doing something."  Trump is again denying plans to withdraw the US from the WTO but tells reporters in the Oval Office that the trade organization needs to change its ways.  Trump has struck US allies with tough tariffs & is planning to impose tough trade penalties on China later this week.  He says the WTO has treated the US "very badly and I hope they change their ways."  He says he's not "planning anything now" but if the WTO doesn't treat the US properly, "we will be doing something."  Trump did not elaborate.  He spoke during a White House meeting with Dutch Prime Minister Mark Rutte.

Trump: WTO needs to change ways or US will do 'something'

Drama coming from an abundance of hot words on intl trade continues.  And nobody knows where this will lead.  Fears are on the rise.  The US economy continues strong & the Jun jobs report on Fri should be good.  But the influence of a favorable jobs report may not be significant compared with new comments on intl trade.  The bulls are happy the Dow closed at its highs today & remains above 24K.  However these are not good times for timid investors.

Dow Jones Industrials

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