Friday, November 30, 2018

Markets rise on hopes for a trade deal this weekend

Dow jumped 199 (closing at session highs), advancers ahead of decliners 5-4 NAZ went up 57.  The MLP index fell 1+ to the 249s & the REIT index was steady at 354.  Junk bond funds rose in price & Treasuries were purchased.  Oil fell to nearly 50 (more below) & gold gave back 3, falling to 1226.

AMJ (Alerian MLP Index tracking fund)

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British Prime Minister Theresa May accused the opposition Labour Party of betraying the British people by trying to stop Brexit as she went on the offensive in her battle to win approval of the widely criticized divorce agreement she negotiated with the EU.  With less than 2 weeks to go before a vote in the House of Commons, May is trying to win support from lawmakers of all parties who have balked at the deal.  She declined to entertain questions about what alternative she might offer if the current agreement is rejected on Dec 11.  "I've got a plan, I've got a proposal, I've got the deal that I've negotiated," she said ahead of the G-20 summit in Argentina.  "We don't see any alternative coming forward from the Labour Party. ... Instead, what I see from Labour is an attempt to frustrate what the government is doing to deliver Brexit for the British people. That is actually a betrayal of the British people."  The agreement ratified by EU leaders last weekend came more than 2 years after a UK referendum in which 52% of those who cast ballots voted to leave the bloc.  Some opponents are calling for a 2nd referendum now that the costs of leaving the EU have become clear, but May says that would violate the trust of the 17.4M who voted for Brexit in 2016.  The prime minister has been highlighting the risks of leaving the EU without a deal in a bid to persuade skeptical lawmakers, including many of her fellow Conservatives, to back the agreement.  Many members of Parliament oppose the deal because it leaves details of the future relationship between Britain & the EU to be negotiated during a transition period that will last least 21 months.  Of particular concern is a backstop that could leave Britain tied to the EU for years if the 2 sides can't agree on how to prevent a hard border in Northern Ireland.  Leaving the EU without a deal would end more than 40 years of free trade & disrupt the flow of goods & services between Britain & its most important trading partners.  The Bank of England warned this week that a no-deal Brexit would plunge Britain into a severe recession.  May's comments came after lawmakers proposed an amendment that could stop Brexit if Parliament rejects her agreement. The amendment says Parliament must be able to express its view on how the gov should proceed if the prime minister's plan is defeated.

UK leader focused on passing Brexit deal despite uncertainty

When OPEC reached a deal with Russia & other producers in 2016 to end a 2-year oil price slump, it was a relatively straightforward affair.  The alliance announced it was slashing output, each country agreed to a specific production quota & intl oil prices rallied about $7 a barrel.  Heading into next week's OPEC meeting, few analysts anticipate such decisive action or so clear-cut an outcome even with the oil market near the bottom of the worst price plunge since the 2008 financial crisis.  Top OPEC producer Saudi Arabia & its Gulf allies are widely expected to orchestrate another output cut when producers meet in Vienna on Thurs.  The signals are clear: Forecasters think the oil market will be oversupplied next year, the cost of crude has tumbled more than 30% in just 8 weeks, & most OPEC members don't stand a chance of balancing their budgets at current price levels.  But the group is dealing with a very different set of challenges than it faced in 2016, including a US pres who is fiercely opposed to price-boosting production cuts.  Analysts expect the meeting to culminate with an official statement that leaves the market scratching its head over just how many barrels OPEC intends to take off the market.  The OPEC alliance agreed 2 years ago to keep 1.8M barrels per day (bpd) off the market, but by this last Apr, the group's output had fallen by about 2.7M bpd.  Instead of clearly stating they would correct by restoring about 1M bpd, producers vowed to return to 100% compliance.  Markets responded to OPEC's ambiguity by pushing oil prices higher, the opposite of what the cartel intended.  In the following months, US crude rallied to a nearly 4-year high at $76.90 a barrel, driven by fears of oil shortages ahead of US sanctions on Iran.  The price has since tumbled 35% over the last 8 weeks, hitting a 13-month low at $49.41 yesterday.

OPEC meeting may end with confusion and lower oil prices

Oil prices fell further today as swelling inventories depressed sentiment despite widespread expectations that OPEC & Russia would agree some form of production cut next week.  The 2 global oil benchmarks, North Sea Brent & US light crude, have had their weakest month for more than 10 years in Nov, losing more than 20% as global supply has outstripped demand.  West Texas Intermediate was down 52¢ (1%) at $50.93, after earlier falling as low as $49.65.  Brent was down 76¢ (1.3%) at $58.75 a barrel, having bounced from a session low of $58.25.  Prices pared losses from session lows after it was reported OPEC's advisory committee suggested decreasing production by 1.3M bpd from last month's levels.  Before the OPEC meeting, the world's top 3 producers — the US, Russia & Saudi Arabia — will be part of a meeting this weekend of the Group of 20 industrialized nations in Buenos Aires, Argentina.  Russia's energy minister Alexander Novak will meet his Saudi counterpart at the G20 summit in Argentina & discuss an oil output reduction in 2019.  He was also reported to have said that Russia's 2019 oil output is expected at the same level as this year but could be adjusted, depending on a deal between OPEC & non-OPEC members.  Surging oil production in the US, Russia & by members of the Middle East-dominated OPEC has helped fill global inventories & create a glut in some markets.  US crude oil production rose 129K bpd in Sep to a fresh record of 11.475M bpd, the Energy Information Administration said.  A slowdown in oil demand growth is compounding the emerging oversupply.  A monthly survey indicates that output in Nov from the 12 OPEC members with supply reduction targets under a previous production agreement fell 110K bpd from Oct, while total OPEC output decreased 160K bpd.  US energy firms this week added oil rigs for a 3rd week in 4 & increased the rig count for the 5th month in a row.

US crude plunges 22% in November, settling at $50.93, for weakest month in over 10 years

Buyers bid up stock prices in the last 3 hours of trading, but much of their interest was in the Dow & NAZ stocks.  Market breadth was weak making it hard to take this advance seriously.  A lot is riding on the outcome of the G-20 meeting & nobody knows what it will bring.  The Dow rose 400 in Nov & is up 600 YTD.

Dow Jones Industrials

Mixed markets ahead of trade talks

Dow lost 7, advancers  barely ahead of decliners & NAZ gained 23.  The MLP index fell 2 to the 245s & the REIT index was about even in the 354s.  Junk bond funds inched higher & Treasuries were purchased.  Oil dropped 1+ to just above 50 &  gold went down 6 to 1223.

AMJ (Alerian MLP Index tracking fund)

CL=FCrude Oil50.08
-1.37 -2.7%

GC=FGold   1,223.10
-7.30 -0.6%

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Srocks opened lower as investors eyed prospects for a positive outcome from planned meeting between Pres Trump & Chinese Pres Xi Jinping at the G-20.  The Sat meeting on the sidelines of the G-20 summit in Argentina is expected to focus on tariffs being placed by Trump on Chinese goods.  Such tariffs are blamed for higher prices on consumer goods for Americans.  In Asian markets today, China's Shanghai Composite ended the day up 0.8% & gained 0.3% for the week.  Hong Kong's Hang Seng was up 0.2% at the close, higher by 2.2% for the week & Japan's Nikkei average closed the day gaining 0.4%, adding 3.3% for the week.  In Europe, London’s FTSE was lower by 0.7%, Germany's DAX slipped 0.6% & France's CAC fell 0.4%.  Yesterday, US stocks finished lower after a PM rally faded.  Banks & technology companies fell after the market pulled off a huge rally the day before when Federal Reserve chair Jerome Powell suggested in a speech that the Fed might be almost done raising interest rates, & is willing to stop raising rates at least temporarily so it can assess the effects of the last few years of increases.  The S&P 500 index shed 0.2% to 2737 & the Dow ended 0.1% lower at 25,338.  The NAZ slid 0.3% to 7273.

US stocks mixed on hopes for positive Trump-Xi meeting at G-20

Growth in China's vast manufacturing sector stalled for the first time in over 2 years in Nov as new orders slowed, piling pressure on Beijing ahead of crucial trade talks between Pres Xi Jinping & Pres Trump this weekend.  If the high-stakes negotiations fail, Trump is widely expected to proceed with a sharp tariff hike on Chinese goods in Jan, which would further strain China's slowing economy & heighten risks to global growth.  Today's downbeat factory activity reading suggested a flurry of stimulus measures by Beijing in recent months has yet to be felt, adding to views that business conditions in China will likely get worse before they get better.  The official Purchasing Managers' Index (PMI), released by the National Bureau of Statistics (NBS), fell to 50 in Nov, missing expectations & down from 50.2 in Oct (the weakest reading in 28 months).  Analysts had forecast little change from Oct at already marginal growth levels.  The 50-point mark is considered neutral territory, indicating no expansion in activity or contraction on a monthly basis.  The Trump administration has pointed to growing signs of economic weakness in China & its slumping stock market as proof that the US is winning the trade war.

China reports weakest factory growth in over 2 years

Minneapolis Federal Reserve Pres Neel Kashkari said that central bankers should not be raising rates while job creation continues to be strong & inflation remains tame.  "For the three years since I've been at the Fed, we have been surprised by the labor market. We keep thinking we're at maximum employment. And then wage growth is tepid. And the headline unemployment rate drops further. Inflation has been well under control," he said.  "If the U.S. economy is creating 200,000 a jobs a month, month-after-month, we're not at maximum employment."  With neither pillar of the Fed's dual mandate from Congress — to promote maximum employment & keep inflation from getting too high — throwing off warnings signs, the Fed should pause on rate increases at this point, Kashkari said.  He added that hiking too forcefully before necessary could risk causing a recession in the US economy.  He believes rates are "close to neutral."  Furthering his case for holding rates steady, Kashkari added "there's still slack" in the labor market.  Unless wages really go up or inflation spikes, a wait-&-see posture at the Fed makes sense, he suggested.  Kashkari is not a voting member on the central bank's policymaking committee this year or next year.  But as a voter in 2017, he was against all 3 rate hikes last year, saying at the time there was no need to move because inflation wasn't a problem.  Over the long term, he thinks the economy won't grow much more than 2% annually.  While that's been seen as a base case for some time, he said that 2% growth at the near zero percent rates of the past is far more difficult to maintain with rates so much higher nowadays.

Fed's Kashkari says rates should not go up when job creation is strong and inflation is tame

An influential Federal Reserve policymaker appears to want the Fed to adopt wholesale changes to the way it targets inflation, urging a new framework that would encourage higher prices & provide more flexibility in US economic downturns.  NY Fed Pres John Williams did not comment on current interest-rate policy today.  Instead he waded into a debate that has just began: the central bank announced in Nov it will conduct an extensive review of its policy strategy & consider alternative approaches.  Williams, who has long favored changes, said the Fed faces "significant challenges" in a world in which neutral, or equilibrium, interest rates have been falling for years in part because people live longer & productivity has generally slipped.  The Fed currently uses a flexible inflation-targeting strategy in which it always attempts to hit a 2% target.  Prices are generally at target now & they did not stray too far below or above even through the last recession & recovery.  Yet inflation expectations could slip if the Fed is repeatedly forced to cut rates to near zero as it did for 7 years.  Williams said this was like "always swimming upstream, fighting a current of too-low inflation expectations that interferes with achieving the target inflation rate."  Instead he highlighted the benefits of "average-inflation" & "price-level" regimes, similar approaches which would compel the Fed to boost prices to make up for periods below target.  "Neither will likely be effective in practice unless communicated clearly and carried out consistently over time," he added at a meeting of Group of 30 central bank officials at the Federal Reserve Bank of NY.  The Fed, under pressure from a critical White House, is taking advantage of good economic times to host a series of forums across the country next year to hear from a "wide range" of stakeholders.  By mid-2019, it could lead to a rethink of the tools it uses and the way it communicates policy decisions.  At the center of the debate will be whether the Fed should continue to rely on large-scale asset purchases, or quantitative easing, in times of crisis - or rather should it adjust the inflation framework so that using QE is less likely.  For his part, Williams said that maintaining the status quo "carries with it the risk that inflation expectations become anchored at too low a level."

Williams backs new Fed approaches to targeting inflation

Today twiddling thumbs is in order.  Not much else to do.  There is very little price movement as traders await developments on trade talks between Trump & Xi Jinping.  The bulls are encouraged to see the Dow above 25K, however it has been staggering a lot in the last 2 months.  After wide swings, Dow is down 120 in Nov

Dow Jones Industrials