Wednesday, September 26, 2018

Markets decline from late day selling after Fed rate hike

Dow dropped 106 after spending most of the day in the black (finishing at the lows), decliners ahead of advancers more than 3-2 & NAZ lost 17 going below 8K once again.  The MLP index gave back 2+ to the 261s & the REIT index was flattish.  Junk bond funds remained in demand & Treasuries were bid higher bringing lower yields.  Oil slid lower to the 71s (still near multi years highs 4 years ago) & gold fell 4 to 1200.

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The Federal Reserve raised short-term interest rates for the 3rd time this year.  The central bank's Federal Open Market Committee increased its benchmark federal funds rate, setting a range of 2.0-2.25% &  continued to signal one more rate hike in 2018.  The policy-setting board removed the word “accommodative” from its statement.  The move indicates that the Fed is moving closer to the end of the current rate-hike cycle.  Officials have been rolling back accommodative monetary policies initially employed after the 2008 financial crisis.  The Fed has indicated it will continue to gradually raise rates at least thru 2019, a strategy used to prevent the economy from growing too fast & keep prices from spiking.  It also began to process of winding down its massive portfolio of gov debt & mortgage-backed securities in late 2017.  Investors have expected the Fed to increase the federal funds rate a total of 4 times this year with the next rate hike likely in Dec.  The Fed has forecast an additional 3 rate increases in 2019.

Federal Reserves hikes interest rates for 3rd time this year

Pres Trump said his tough stance on trade is causing China to attempt to interfere in the upcoming US midterm elections against his administration, before the UN Security Council.  “Regrettably, we’ve found that China has been attempting to interfere in our upcoming 2018 election, coming up in November, against my administration,” he said.  “They do not want me — or us — to win because I am the first president ever to challenge China on trade. And we are winning on trade.”  A Chinese official called the accusations “unwarranted” & insisted it did not and will not interfere “in any country's domestic affairs.”  In a follow-up on Twitter, Trump claimed China was "placing propaganda ads" in newspapers.  Trump also slammed China during his address before the UN General Assembly yeserday, calling the country out specifically for its trade practices & “market distortions,” as he deemed the trade imbalance between the pair of economic powerhouses unacceptable.  He also cited it as a country that was admitted to the World Trade Organization despite violating “every single principle on which the organization is based,” including forcing technology transfers & stealing intellectual property.  “Those days are over, we will no longer tolerate such abuse,” Trump added.  “We will not allow our workers to be victimized.”  The Trump administration implemented another round of tariffs on $200B worth of Chinese imports on Mon, while Beijing implemented countermeasures on $60B worth of US goods.  Chinese officials consequently canceled upcoming trade talks between the 2 countries.  The Beijing gov also accused the pres this week of using bullying tactics to bend others into submission.

Trump: China meddling in US midterms against my administration

China announced more tariff cuts on imports of construction machinery & other goods, but took no action to address US complaints about its technology policy that are fueling an escalating trade battle.  The move reflects the Chinese gov's desire to stick to plans to make the economy more competitive & its intention to press on with state-led development of industry.  It gave no indication the reductions would apply to US goods, on which Beijing has imposed additional taxes of 5-25%.  The tariff cut, effective Nov 1, applies to 1585 types of goods including construction equipment, industrial machinery, paper products & building materials.  It is the 2nd reduction in less than a year following a cut last Nov for food & consumer goods.  Pres Xi Jinping's administration has this year announced a series of measures to open up the Chinese market to outside competition but none addresses US complaints that the gov steals or pressures foreign companies into handing over technology.  The US, Europe & other trading partners say initiatives such as "Made in China 2025," which calls for state-led creation of champions in robotics & other fields, violate Beijing's obligations to open up its market to foreign companies.  American officials worry they might erode US industrial leadership.  Negotiations were impossible while DC "holds a knife" to Beijing's neck by imposing tariff hikes, a Chinese deputy commerce minister said.  A Chinese gov report accused Trump of bullying other countries & destroying "mutual trust" required for intl relations.  That dampened hopes for a settlement & prompted suggestions China might go so far as waiting for Trump to leave office instead of negotiating.  Meanwhile, experts are trying to understand what economic impact the trade war might have.  In research published today, economists at the ECB said they simulated a wide-ranging trade war & found it would hurt the US economy significantly, making households poorer & destroying jobs, while China would not suffer as much.  The researchers concluded that stock & bond markets could be hurt by a general loss of confidence in the economy, & that "an escalation of trade tensions could have significant adverse global effects" on growth.  The Asian Development Bank said that trade conflicts, rising debt & the potential impact from rising interest rates in the US will likely dampen growth in the coming year.  The regional lender based in Manila, Philippines, said it expects economic growth in Asia to remain at a robust 6.0% in 2018 but to slip to 5.8% next year.  China's economy is expected to expand at a 6.6% annual pace this year but slow to 6.3% in 2019.  Chinese Communist leaders have tried to deflect foreign frustration over their industry plans by highlighting China's growth as an import market, better protection of foreign patents & copyrights & other gains.  They see initiatives such as "Made in China 2025" as a path to prosperity & global influence.  Under the latest changes, tariffs on electronic equipment & other industrial products will be cut from 12.2% to 8.8%, according to a Cabinet statement.  It said charges on textiles & building materials will fall from 11.5% to 8.4% & those on paper & other resource products from 6.6% to 5.4%.

China cuts some tariffs _ but does not address US complaints

The Fed remains on its policy path despite an indication from the central bank that it is no longer taking an "accommodative" stance, Chairman Jerome Powell said.  Markets had been watching closely to see whether the Fed would drop the language, which has been in place going back years through its efforts to pull the economy out of its financial crisis-era malaise.  The policymaking FOMC issued a statement after its 2-day meeting without the phrase.  "The change does not signal any change in the likely path of policy," Powell told reporters.  "Instead it is a sign that policy is proceeding in line with our expectations."  Stocks rallied after the Fed meeting & bond yields edged lower.  There was some chatter that dropping "accommodative" meant the Fed was getting close to the end of the current rate-hiking cycle as it saw the ability to stop at the "neutral rate" of interest.  However, FOMC members did not change their longer-run forecasts, still anticipating one more rate hike in 2018, 3 more in 2019, another one in 2020 & then keeping the funds rate ½ a percentage point above where it sees the longer-run neutral.  Powell emphasized his view on "accommodative" by saying economic growth remains strong & that further hikes would be appropriate.  "This action reflects the strength we see in the economy and is one more step in the process that we began almost three years ago of gradually returning interest rates to more normal levels," Powell added.

Fed's Powell says drop of 'accommodative' language doesn't signal any change in rate hike path

The stock market took the rate increase with a sense of calm until the last hour when there was significant selling led by bank shares.  More hikes are coming but they should not have a major impact on the economy if it continues to grow.  Trade issues can have a much larger affect since nobody knows what tariff adjustments are going to be made.  US-Japan trade talks are just beginning & Japan is another major trade partner for the US.  After putting in a good performance in Sep, the last week has been gloomy.  Q4 could be a choppy time for stocks even though the averages are starting near record levels.

Dow Jones Industrials

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