Monday, August 27, 2018

Markets rally after the US and Mexico announce preliminary trade deal

Dow jumped up 259, advancers over decliners better than 3-2 & NAZ rose 71.  The MLP index fell 1 to the 288s & the REIT index added 2 to 360.  Junk bond funds were flattish & Treasuries continued weak.  Oil remained higher in the 68s & gold was up 2 to 1215 (more on both below).

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The US & Mexico reached an agreement to enter a new trade deal, ending months of talks on a replacement for NAFTA (abbreviation for North American Free Trade Agreement).  The new trade pact will be called “The United States Mexico Trade Agreement,” Trump said when announcing the deal from the Oval Office, adding that the previous name would be scrapped.  “It’s a big day for trade, it’s a bid day for our country,” Trump said.  “A lot of people thought we’d never get here because we all negotiate tough – we do, so does Mexico.”  Trump said the US has yet to begin negotiations with Canada.  NAFTA has come under fierce scrutiny by Pres Trump, who called the agreement the “worst trade deal ever made.”  Attempts to form a new pact faltered numerous times between the 3 countries & talks with Mexico have been focused on creating new rules for the auto industry.  Trump has argued that lower wages for employees in Mexico have cost jobs at General Motors (GM), Ford (F) & Fiat Chrysler (FCAU) – “The Big Three” – all of which have production sites in Mexico.  The pres said in Jun that a refurbished NAFTA deal could remain trilateral or could be renegotiated into 2 separate arrangements.  Canada said it would only sign a new NAFTA if it benefited the country & its middle class, despite showing optimism for progress the US & Mexico made on a bilateral agreement of their own.  “Progress between Mexico and the United States is a necessary requirement for any renewed NAFTA agreement,” a spokesperson for Canada's Foreign Minister Chrystia Freeland said.  “We are in regular contact with our negotiating partners, and we will continue to work toward a modernized NAFTA. We will only sign a new NAFTA that is good for Canada and good for the middle class. Canada’s signature is required.”

US, Mexico reach new trade agreement, stocks soar

A measure of the US economy from the Chicago Federal Reserve slowed in Jul from Jun's robust performance, owed in large part to lighter output at the nation's factories.  The Chicago Fed's index of national economic activity registered at a positive 0.13 last month, down from an upwardly revised positive 0.48 in Jun.  The swings put added emphasis on following the index's less-volatile, 3-month moving average.  It edged down to positive 0.05 in Jul from an upwardly revised positive 0.20 in Jun.  The Chicago Fed index is a weighted average of 85 economic indicators, designed so that zero represents trend growth & a 3-month average below negative 0.70 suggests a recession is underway.  36 of the 85 individual indicators made positive contributions in Jul, while 49 made negative contributions.  34 indicators improved from Jun to Jul, while 51 indicators deteriorated.  Production-related indicators, meaning factories, contributed a positive 0.05 in Jul, down sharply from a positive 0.45 in Jun.  The reading reflects the results of the latest industrial production report from the Federal Reserve & the Institute for Supply Management's new-orders index, which decreased to 60.2 in Jul from 63.5 in Jun.  The contribution of the personal consumption & housing category was a negative 0.07 in Jul from negative 0.06 in Jun.  New-home sales dropped to a 9-month low as the housing market starts to wobble.  Elsewhere, the employment-related indicators contributed positive 0.12 to the Chicago Fed's national index in Jul, up from positive 0.03 in Jun.   Labor Dept data earlier this month revealed the unemployment rate ticked down to 3.9% in Jul from 4% in Jun.

Factory slowdown is behind weaker Chicago Fed’s national economic index for July

Gold prices settled higher, extending their gain from last week, as the $ fell following news of a trade agreement between the US & Mexico.  Against that backdrop, the precious metal & the US currency continued an inverse relationship, with Dec gold up $2.70 (0.2%) to settle at $1216 an ounce as a leading $ index DXY fell 0.4% to 94.768.  Gold often trades higher when the $ weakens, & vice versa, because the precious metal is traded in the greenback.  Gold had logged a gain of about 2.5% last week, the first weekly rise in 7.  The ICE $ Index, the popular indexed measure of the buck against 6 rivals, was down 1% for last week, which was the sharpest weekly slump since Feb.  It was still up 0.3% for Aug so far as rising interest rates increase the opportunity cost of holding nonyielding gold, while boosting the $.  Rates were in focus again recently when Federal Reserve Chairman Jerome Powell, at the annual Fed symposium in Jackson Hole last week when he said gradual US interest-rate hikes remain appropriate & there was no risk to the economy overheating.  He also said he was prepared to do “whatever it takes” if inflation becomes unanchored to the upside or downside “or should crisis threaten again.”

Gold settles higher as dollar falls in wake of U.S.-Mexico trade pact

Oil prices ticked slightly higher, pausing after last week's substantial gains as a committee monitoring a deal between OPEC & non-OPEC producers saw production increasing & a US-China trade war also weighed on sentiment.  Intl Brent crude oil future rose 37¢ to $76.19 per barrel & West Texas Intermediate (WTI) crude futures ended the session 15¢ higher at $68.87 a barrel.  Last week, WTI posted a 4.3% weekly gain while Brent marked a 5.6% weekly increase.  Traders said prices pulled back after market intelligence firm Genscape reported that inventories at the Cushing, Oklahoma, delivery hub for WTI rose by about 764K barrels last week.  Members of an OPEC & non-OPEC monitoring committee found producers cut their Jul output by 9% more than called for in their output reduction pact.  This compared with a compliance level of 120% for Jun & 147% for May, meaning participants have been steadily increasing production.  OPEC & other producers led by Russia agreed in Jun to return to 100% compliance with oil output cuts that began in Jan 2017.  This follows months of underproduction by Venezuela & other producers which cut output by 160% of the agreed target.  Prices have been buoyed in recent weeks by the view that the oil market will tighten when US sanctions targeting OPEC member Iran's oil exports kick in Nov.  Iran has exported around 2.5M barrels per day (bpd) of crude oil so far this year.  Analysts expect this figure to fall by at least 1M bpd once sanctions kick in.  French Pres Macron & Iranian Pres Rouhani said today that Iran wanted the Europeans to give guarantees on banking channels & oil sales as well as in the field of insurance & transportation.  Pressuring oil prices have been concerns that an escalating US-China trade war could slow economic growth & energy demand.  China's Unipec will resume purchases of US crude in Oct after a 2-month halt due to the trade dispute between the 2 economies.

Oil steady as trade worries and rising output weigh on market

News about the trade deal brought out buyers.  Stocks were higher at the start of trading & never looked back.  They continued at elevated levels throughout the trading session.  However, market breadth was not impressive.  The Dow needs another 500+ to top the Jan 26 record while other popular averages are setting new records.  The Dow rose 600 this month & went over 26K, a time that can bring a lackluster stock market.  Looking forward, Sep has the reputation for the being the worst month of the year.

Dow Jones Industrials

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