Monday, December 31, 2018

Higher markets on optimism for a US-China trade deal

Dow jumped 178, advancers over decliners 4-3 & NAZ advanced 24.  The MLP index added 1+ to 221 & the REIT index was little changed.  Junk bond funds rose in price & Treasuries crawled higher.  Oil slid back to the 37s & gold was off 1 to 1281.

AMJ (Alerian MLP Index tracking fund)

CL=FCrude Oil45.45

GC=FGold   1,282.30
 -0.70 -0.1%

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Stocks opened higher, the last trading day of the year, as investors focused on evidence that trade talks between America & China are advancing.  Pres Trump & Xi Jinping talked via phone on Sun & expressed willingness to strike a trade deal afterwards.  Trump said "big progress" was being made on a potential trade deal.  Earlier this month, the 2 nations agreed on a 90-day ceasefire in the trade war that will begin Tues.  A spokesperson for China’s foreign ministry offered an upbeat statement about prospects for successful negotiations. "China stands ready to work with the United States to move forward the China-U.S. ties which are underpinned by coordination, cooperation and stability,” the spokesperson said.  In Asian markets, Hong Kong shares climbed over 1%, closing an otherwise bearish 2018 on a firm note.  In a shortened trading session, the Hang Seng index rose 1.3 %, but lost 13.6% of its value for the year, the worst decline since 2011.  Trading for the year in China & Japan ended Fri.  China's Shanghai Composite lost 24.6% for the year.  Japan's Nikkei declined 12% for the year its first annual decline since 2011.  In Europe, London's FTSE traded higher by 0.3% & France's CAC rose 1%.  Germany's DAX was closed, having ended the trading year on Fri losing 18% for the year.  On Fri, US closed out a wild week that saw stomach-churning gains & losses as investors weighed an array of concerns.  Major averages snapped a 3-week losing streak but remain down for the month.  While all 3 major averages, the Dow, S&P 500 & NAZ, were up for the week, they are all down more than 9% so far this month, which  has only one more trading day.

Stock investors focus on progress in US-China trade talks

US companies have sent home over ½T$s of cash they held overseas in 2018 to take advantage of tax changes, but data suggest the pace is slowing, potentially removing a key source of support for US stocks.  $ repatriation in the Jul-Sep period fell to $93B, around ½ of Q2 volumes & less than 1/3 of the $300B sent home in Q1, US current account data shows.  The repatriation bonanza followed new regulations that allowed the US gov to tax profits accumulated overseas, regardless of where the money was held.  Prior rules allowed companies to "defer" US tax on worldwide profits unless they repatriated the money.  The change offered a powerful incentive to bring home some of the $3T US firms were believed to hold in jurisdictions ranging from Ireland to Switzerland, either in cash or in securities such as Treasuries.  Because companies had probably already pre-booked a one-off tax hit for the year, repatriation will have dwindled further in the last qyr.  Ireland, which hosts the European hubs of US technology & pharmaceutical companies saw Treasury holdings drop $40B  between end-2017 & end-Oct 2018, falling by over 1/10 in Jan-Oct to $287.6B.

US companies repatriate more than half a trillion dollars in 2018

Activity in China's manufacturing sector contracted for the first time in more than 2 years in the month of Dec amid a domestic economic slowdown & Beijing's ongoing trade dispute with the US.  The Chinese National Bureau of Statistics said official manufacturing Purchasing Managers' Index (PMI) was 49.4, lower than the 49.9 expected.  The Dec reading was the weakest since Feb 2016.  That was worse than Nov's official manufacturing PMI, which was 50.0.  A reading above 50 indicates expansion, while a reading below that signals contraction.  In particular, new export orders contracted for a 7th straight month, with that measure falling to 46.6 from 47.0 in the previous month.  Meanwhile, China's official non-manufacturing PMI came in at 53.8, which was higher than the reading of 53.4 in Nov.  The services sector accounts for more than ½ of the Chinese economy.  Economic data is being closely watched for signs of damage inflicted by the ongoing trade war between DC & Beijing.  At the beginning of Dec, Pres Trump & Chinese Pres Xi Jinping agreed to a 90-day ceasefire that delayed the planned Jan 1 US increase of tariffs on $200B  worth of Chinese goods while they negotiate a trade deal.  On Sat, Trump said that he had a “long and very good call” with Xi & that a possible trade deal between the 2 countries was progressing well.  Yet beyond the tariffs battle, China's economy has been facing its own domestic headwinds.  Even before the escalation in trade tensions with the US this year, Beijing was already trying to manage a slowdown in its economy after 3 decades of breakneck growth.  Despite the tariff fight with the US over the last year, the Chinese manufacturing & export sectors held up well in 2018.  Analysts however, attributed the robustness to exporters pushing forward shipment dates, also called front-loading, a phenomenon that was expected to run out of steam, as freight rates indicated.  In Oct, China reported economic growth of 6.5% year-over-year in Q3, the weakest pace since Q1-2009 as the country's trade war with the US put pressure on growth.  China's official growth target this year is around 6.5%.

China’s manufacturing activity contracts even more than expected

The Brexit vote may have a major impact on whether or not the US & Britain can work out a trade deal.  If Parliament approves the Brexit proposal from Prime Minister Theresa May, the US ambassador to Britain has cast doubts on a major deal getting done.  Robert "Woody" Johnson said that negotiating a "quick" & "massive" trade deal between the 2 longtime allies "doesn't look like it would be possible" under the terms of May's proposed deal with the EU.  Johnson also used a radio appearance to reiterate Pres Trump's concerns about the proposed agreement, which faces strong opposition in Britain's Parliament.  May has said she plans to bring the plan to a vote in mid-Jan.  The US ambassador said he finds a "defeatism" in the British attitude toward Brexit that overlooks the many positive developments leaving the EU could bring.

US ambassador says major trade deal with UK may not be possible

Hope springs eternal on hopes for a US-China trade deal.  But that will require a lot more work.  Traders are closing out positions for their portfolios.  In the absence of major late day news stories, buying & selling in the closing hours today should not be meaningful.

Dow Jones Industrials

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