Tuesday, October 23, 2018

Markets pare early deep losses on volatile day

Dow finished off 125 (erasing much of the early plunge), decliners over advancers 2-1 & NAZ fell 32.  The MLP index lost 3+ to the 265s & the  REIT index declined 3+ to the 336s.  Junk bond funds did little & Treasuries rose, but early gains were pared when stocks rallied.  Oil plunged 2+ to  the 66s (much more below) & gold still rallied, up 9 to 1234.

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German Chancellor Angela Merkel has agreed to import more liquefied natural gas (LNG) from the US – a major concession to Pres Trump, who's pressured the EU to do so as part of renewed trdae negotiations.  “That means for the first time, we are going to have an LNG terminal in Germany,”  US Ambassador to Germany Ric Grenell said.  “And it’s very good news.”  The German gov will co-finance the construction by a private consortium of a $576M LNG shipping terminal in northern Germany.  So far, the gov is weighing 3 sites, all of which are equipped with teams that are looking at financing the project, Grenell said.  But he also suggested that Merkel may expand the energy market even more by investing in 2 LNG sites.  “They haven’t announced how much, but have said they’ll invest in at least one site,” he added.  Germany currently acquires most of its natural gas from Russia by pipeline, so US officials reportedly hope that an increase in American gas might help reduce the threat to DC by decreasing Germany's reliance on Russia for its energy.  Merkel told lawmakers that the terminal will likely not break even for at least 10 years.  “There’s a whole bunch of companies that are very eager, including U.S. companies, to build it, to be a part of it,” Grenell said.

After Trump push, Germany to invest in US gas imports

The EU set up a high-stakes battle with Italy, one of the bloc's biggest economies, over who has final control over a member state's budget after the executive Commission took the unprecedented step of ordering the country to revise its public spending plans.  In a move that escalates a month long standoff, the EU said the populist gov's budget for next year is out of line & breaks earlier promises to lower public debt.  Italy's debt load is the 2nd-highest in Europe, after Greece, & there are worries that losing control of spending could rekindle financial turmoil in Europe.  The populist Italian gov says the sharp increase in spending is needed to jump-start growth after years of malaise.  "We see no alternative but to request the Italian government to revise its draft budgetary plan," EU Commission VP Valdis Dombrovskis said.  Italian Deputy Prime Minister Matteo Salvini was quick to warn the EU to keep its hands off.  "No one will take one euro from this budget."  The confrontation laid bare the fundamental problem within the eurozone where 19 EU nations share the same currency, yet govs maintain autonomy over spending priorities & the EU has been reluctant to enforce spending limits.  Since the euro economy can be destabilized when one member state loses control of its finances, like Greece did a decade ago, the other nations want to have some say over excessive spending, especially when it concerns the region's 3rd-biggest economy.  The EU Commission said it had no choice after Italy proposed a deficit of 2.4% of GDP for next year, 3 times more than what it had previously targeted.  The higher deficit means Italy would not fulfill its promise to lower its debt, which is over 130% of GDP & more than twice the EU limit of 60%.  Without a tough stance on the issue, the EU could see its credibility erode & markets could lose confidence in its ability to keep public spending in check.  The Commission wrote in its official opinion that "given the size of the Italian economy within the euro area, the choice of the government to increase the budget deficit ... creates risks of negative spill-overs for the other euro area member states."

EU rejects Italy's budget, raising stakes in dispute

The risk of a powerful economy overheating is the reason the Fed should stick to its schedule of interest rate increases, Atlanta Federal Reserve Pres Raphael Bostic said.  With the jobless rate running at 3.7% & considerably below what is considered full employment, the Fed has to weigh the risks of tightening too quickly & choking off what has been a robust economic run, & waiting too long & risking runaway price pressures.  “And while I wrestle with that choice, one thing seems clear: there is little reason to keep our foot on the gas pedal,” Bostic said in a speech.  The reference is to the accommodative policy the Fed has maintained since the financial crisis.  Bostic acknowledged headwinds to growth including tariffs & a strong bout of financial market volatility, against the tailwinds of tax cuts & other fiscal stimulus.  “After digging through the data, consulting our economic models, and gathering a Main Street perspective from our extensive network of business contacts, I come away with the sense that economic growth is on a strong trajectory,” he added.  “It’s on solid footing and hasn’t been materially pushed higher or lower.”  The speech comes as the Fed has hiked its benchmark interest rate target 3 times this year & is on track for a 4th in Dec.  Current projections from FOMC members point to 3 more increases in 2019 & one or 2 more in 2020.  Bostic said he had a hard time finding synonyms for “strong” to describe the economy.  “That does not mean that the trajectory for the economy is immovable,” he said.  “There are ample reasons for a central banker like me to be concerned. But, from my perspective, the economy is performing well enough to stand on its own without support from accommodative monetary policy.”

Oil prices fell more than 4% today, pressured by stock market weakness & vows by top oil exporter Saudi Arabia to meet the demands of the world's oil consumers.  US light crude ended the session down $2.93 (4.2%) to $66.43 a barrel, after earlier hitting a 2-month low at $65.74.  The contract posted its biggest daily loss since Jul 11, when it fell 5%, & settled below its 200-day moving average for the first time in more than a year.  Intl benchmark Brent crude fell $3.70 a barrel, down 4.6%, to $76.13.  The contract earlier touched $75.88, its lowest level since Sep 7.  The Dow fell nearly 500 at the day’s low, on disappointing earnings & stoking concerns about slowing global economic growth.   US crude & Brent have each fallen by about $10 from their nearly 4-year closing highs on Oct 3.  The prospect of weaker-than-expected economic growth has already led some forecasters to trim their expectations for oil demand.  This month, OPEC & the Intl Energy Agency both knocked down their projections for growth in global oil consumption.  Crude futures were already under pressure after Saudi Arabia's energy minister sought for a 2nd straight day to assure markets that the kingdom will keep the world adequately supplied with crude.  The killing of journalist & US resident Jamal Khashoggi by Saudi agents has stirred calls for US sanctions on the kingdom.  Saudi Arabia said last week it would retaliate against any punishment for the killing.  However, Saudi Energy Minister Khalid al-Falih said yesterday the country has no intention of cutting back oil supply & said Saudi Arabia still intends to increase production to meet demand as US sanctions shrink Iran's crude exports.

US crude plunges 4.2%, settling at $66.43, in biggest daily loss in three months

McDonald’s (MCD), a Dow stock & Dividend Aristocrat, rallied on a better-than-expected Q3 report, which showed a strong performance in intl markets & higher spending per customer in the US.  Value deals in the US, including a revamped Dollar Menu, helped bring in customers, but the larger tickets prove diners are willing to spend a little bit more.  Restaurant owners are still looking for a stronger pick-up in customer traffic from efforts the company is making to revitalize its restaurants.  However, the solid performance outside the US was encouraging.  Many of the intl markets have already made some of the changes that are being rolled out in the US. 
  • Adjusted EPS:       $2.10 vs. $1.99
  • Revenue:               $5.37B vs. estimates of $5.32B
  • Same-store sales:     2.4% growth in the US, in-line with estimates
Still, earnings & revenue both declined from a year ago, as the company refurbishes restaurants & adds upgrades such as self-order kiosks & table service.  MCD also has tried to improve its menu, including adding fresh beef hamburgers & new coffee drinks, & partnered with Uber Eats on delivery to bring customers back.  But these upgrades aren’t boosting revenue & earnings fast enough to satisfy some franchisees.  A qtr of its US restaurant operators met earlier this month & are considering banding together to push for more support from the company.  But the company continues to support its plans.  “We remain confident that our strategy will drive long-term, profitable growth,” CEO Steve Easterbrook.  “The sales and guest count recovery period after we complete a project has also been a little inconsistent,” Kevin Ozan, CFO, said.  “So we’ve put processes in place to execute strong grand reopening plans after construction that involve our local communities.”  EPS of $2.10,was down from $2.32 a year ago, but exceeded expectations of $1.99.  The company said foreign currency exchange rates reduced its EPS by 5¢.  Revenue fell 7% to $5.37B from a year-ago exceeding forecasts of $5.32B.  Same-store sales rose 4.2% globally, compared to expectations of 3.6%.  US same-store sales grew 2.4% in-line with forecasts, marking the 13th consecutive qtr of positive same-store sales growth.  The stock jumped up 10+ (6%).
If you would like to learn more about MCD, click on this link:

McDonald's shares rise 6% as menu price increases, global growth fuel earnings beat

Selling in the AM may have been related to weakness in the Chinese markets.  The bulls returned & the popular averages were able to recover much of the damage.  Then in the last ½ hour, selling returned.  Market breadth was discouraging.  The volatility index (VIX) had been up to 24 early in the day & finished the day at 20+.   However that compares with values in the low teens for much of the year.  Traders are nervous, not a good sign. 

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