Wednesday, August 15, 2018

Markets tumble on worries about Turkey

Dow sank 277, decliners over advancers better than 3-1 & NAZ lost 177.  The MLP index fell 4+ to the 287s & the REIT index went up 1+ to the 354s.  Junk bond funds were lower & Treasuries rose, taking the yield on the 10 year Treasury down 5 basis points to 2.84%,  Oil dropped almost 2 to the 65s & gold lost another 10 to 1190, solidly below the important 1200 floor.

AMJ (Alerian MLP Index tracking fund)

CL=FCrude Oil65.81
  -1.23 -1.8%

GC=FGold  1,187.50
-13.20 -1.1%

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Stocks slipped with the Dow falling by triple digits as traders remained concerned about the escalating feud between the US & Turkey, while shrugging off the latest positive US economic data.  Stateside, investors had a batch of economic data to contend with.  Retail sales rose 0.5% in Jul, well above the 0.1% increase that was expected.  Also, Q2 US productivity climbed 2.9%.  The financial crisis in Turkey remains in focus as the lira gained some strength when the country reportedly raised tariffs on US goods including alcoholic beverages, passenger cars, tobacco, cosmetics, rice & coal.  This was retaliation against the US for the initial sanctions placed against Turkey for not freeing American pastor Andrew Brunson who faces terrorism charges & a prison sentence.  Stocks finished higher yesterday as the lira weakened slightly following its recent tumble.  Commodities were mostly lower, feeling the pressure of a rising $.

Stocks slip as Turkey escalates feud with US

China & the US are engaged in a tit-for-tat trade war, but if economic health is the biggest bargaining chip, then it seems as if the US is poised to win.  While the US economy is firing on all cylinders with a blockbuster earnings season wrapping up, low unemployment & solid GDP growth, China's economy appears to be stuttering.  Data released yesterday showed that spending on fixed assets such as factory machinery & public works projects fell to its lowest level since 1999.  Fixed-asset investment expanded by 5.5% in the Jan-Jul period & Beijing cracked down on local gov borrowing to finance projects.  Industrial output was also a miss, due to pollution curbs & an uncertain trade outlook.  This comes after the country's stock market has taken a hit, with the Shanghai Composite falling into a bear market in Jun while the major US stock market indices are hovering near record highs.

China feeling the brunt of trade war

US homebuilders are slowly losing confidence in their business.  A monthly index of builder sentiment fell one point to 67 in Aug, the lowest level since Sep 2017.  Sentiment was unchanged from one year ago, according to the National Association of Home Builders.  Anything above 50 is considered positive sentiment & the index hit a recent high of 74 last Dec.  Yet there are signs of growing concern among builders.  "The good news is that builders continue to report strong demand for new housing, fueled by steady job and income growth along with rising household formations," said NAHB Chairman Randy Noel.  "However, they are increasingly focused on growing affordability concerns, stemming from rising construction costs, shortages of skilled labor and a dearth of buildable lots."  Sales of newly built homes fell 5.3% from May to Jun, according to the latest reading from the US Census.  Jun new home sales, meanwhile, were a meager 2%  higher compared with the same month last year.  Prices for new & existing homes continue to rise, & higher mortgage rates this year have only weakened affordability applications to purchase a home have been falling all month, even though interest rates are currently moving in a very narrow range.  Of the NAHB index's 3 components, current sales conditions fell one point to 73, sales expectations over the next 6 months fell one point to 72 & buyer traffic dropped 2 to 49 (the only component in negative territory).  The housing market has been softening for the last several months, as younger homebuyers are increasingly unable to find affordable homes.  Homebuilders are ramping up production slowly, after the worst housing crash in history, but they are mostly building on the move-up & high-end levels, not at the entry level where demand is strongest.  High construction costs make it more difficult to profit on low-priced homes.  Builders are also concerned that material prices will increase even more as Pres Trump ramps up pressure on trading partners.  "Builders continue to monitor how tariffs and the growing threat of a trade war are affecting key building material prices, including lumber," said NAHB chief economist Robert Dietz.  "These cost increases, coupled with rising interest rates, are putting upward pressure on home prices and contributing to growing affordability challenges."  Looking at 3-month moving averages for regional sentiment scores, the South & West each held steady at 70 & 75, respectively.  The Northeast fell 3 to 54 & the Midwest also fell 3 to 62.

Homebuilder sentiment falls to the lowest point in almost a year as affordability concerns intensify

US retail sales rose more than expected in Jul as households boosted purchases of motor vehicles & clothing, suggesting the economy remained strong early in Q3.  The Commerce Dept said retail sales increased 0.5% last month.  But data for Jun was revised lower to show sales gaining 0.2% instead of the previously reported 0.5% rise.  The forecast called for retail sales nudging up 0.1% in Jul.  Retail sales in Jul increased 6.4% from a year ago.  Excluding automobiles, gasoline, building materials & food services, retail sales advanced 0.5% last month after a downwardly revised 0.1% dip in Jun.  The core retail sales correspond most closely with the consumer spending component of GDP.  Core retail sales were previously reported to have been unchanged in Jun.  Consumer spending is being supported by a tightening labor market, which is steadily pushing up wages.  Tax cuts & higher savings are also underpinning consumption.  Jul's increase in core retail sales suggested the economy started Q3 on solid footing after logging its best performance in nearly 4 years in Q2.  GDP surged at a 4.1% annualized rate in Q2, almost double the 2.2%  pace in Q1.  While the economy may not repeat the Q2 robust performance, growth in Q3 period is expected to top a 3.0% rate.  Auto sales rose 0.2% in Jul after edging up 0.1% in Jun & receipts at service stations increased 0.8%.  Sales at clothing stores rebounded 1.3% after declining 1.6% in Jun.  Online & mail-order retail sales increased 0.8%, likely boosted by Amazon's (AMZN) "Prime Day" promotion.  That followed a 0.7% rise in Jun.  Americans spent more at restaurants & bars, lifting sales 1.3%.  But receipts at furniture stores fell 0.5% & sales at building material stores were unchanged last month.  Spending at hobby, musical instrument & book stores declined further in Jul, falling 1.7%.

US retail sales increase strongly in July

Selling at the opening started the day on the wrong foot & the selling has not stopped.  The Dow is below 25K.  Higher tariffs on Turkish trade should not have a big impact on the US economy.  But intl banks are interconnected & it's difficult to understand how they will impacted by Turkey's problems.  Even though money is fleeing risky investments (stocks), it is not buying gold.  Treasuries are the old safe haven investments, at least for the time being.

Dow Jones Industrials

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