Monday, December 31, 2018

Markets advance on US China trade hopes

Dow soared 265 with selling into the close, advancers over decliners 2-1 & NAZ rose 50.  The MLP index gained 2+ to the 221 (still depressed as shown below) & the REIT index was about even.  Junk bond funds went higher & Treasuries were purchased, taking the yield on the 10 year treasury down to 2.69%.  Oil went up to the 45s (more below) & gold inched up 1 to 1284.

AMJ (Alerian MLP Index tracking fund)

Live 24 hours gold chart [Kitco Inc.]

3 Stocks You Should Own Right Now - Click Here!

China's economy & stock market are showing signs of softness amid an ongoing trade war with the US.  The country's Bureau of Statistics just announced that manufacturing activity shrank in Dec, for the first time in more than 2 years.  China's Purchasing Managers' Index was 49.4 this month, which was the weakest level recorded since Feb 2016 & it was the result of a drop in new export orders.  Meanwhile, the major Chinese stock index suffered double-digit losses in 2018.  The Shanghai Composite fell more than 24% for the year, its largest annual decline in a decade.  During Q3, China's GDP growth missed expectations, coming in at 6.5%.  The Trump administration has imposed tariffs on about $200B  worth of Chinese imports.  He had threatened to raise the tariff rate to 25%, but during the G-20 summit in Buenos Aires earlier this month Trump agreed to hold off on increasing tariffs for at least 90 days while negotiations continue.  Over the weekend, leaders from both countries had positive things to say about the prospects for trade progress following a phone call on Sat.  Meanwhile, the trade battle has rattled US investors, as well.  The US equity market is on track for its worst Dec performance since the 1930s & its 2nd down year since 2008.  The end of the year, in particular, has been marked by a pickup in volatility.  On the other hand, GDP growth has remained relatively strong throughout 2018, expanding at 3.4% in Q3.  In Q2, GDP the growth rate was 4.2%.  The downturn was attributed, in part, to a reduction in exports.

How the trade war is affecting China's economy

Trump’s endorsement could prove key to moving any plan forward, given the obstacles to overcoming a presidential veto.  And the GOP-dominated upper chamber is unlikely to vote on any bill the pres hasn't approved.  “It’s simple: The Senate is not going to send something to the President that he won’t sign,” a spokesman for Senate Majority Leader Mitch McConnell said.  To overcome a presidential veto, at least 55 Reps would have to vote with every Dem in the House.  Overcoming a veto would also require the votes of 67 senators.  Reps will control 53 senate seats in the next Congress.  The partial gov shutdown entered its 10th day on New Year's Eve with little signs of progress.  In a series of posts on Twitter, the pres re-upped his demands for border wall funding. 
“I campaigned on Border Security, which you cannot have without a strong and powerful Wall,” the pres posted.  “I’m in the Oval Office,” he wrote in another.  “Democrats, come back from vacation now and give us the votes necessary for Border Security, including the Wall.”

In a year when analysts predicted oil would surpass $100 for the first time in 4 years, the oil market instead experienced its worst annual loss since 2015.  The oil market's sudden about-face in Q4 has ended a 2½-year recovery for oil prices following the 2014-2016 downturn.  Analysts expect oil prices to rebound next year, but the geopolitical risks that have weighed on the market throughout 2018 will remain a big variable in the new year.  US crude settled at $45.41 a barrel, ending the year down nearly 25%.  At around $54 a barrel, intl benchmark Brent crude is down almost 20% in 2018.  The declines mark the first annual loss & the biggest yearly drop since 2015, when both contracts fell more than 30%.  Just 3 months ago, oil was trading at nearly 4-year highs.  While many analysts said the rally was unwarranted & warned a pullback was in the cards, few predicted the market would sell off so sharply.  From peak to trough, US crude has shed nearly ½ its value.  With the benefit of hindsight, it's fairly easy to explain oil’s plunge into a bear market.  In May, the Trump administration restored sanction on Iran, OPEC's 3rd-biggest producer, raising concerns about a supply squeeze in the oil market.  The following month, OPEC & a group of producers led by Russia abandnoned the 2016 agreement to restrict supply.  At the urging of Trump & oil customers, Saudi Arabia in particular turned on the ttaps, adding about 1M barrels per day to the market between Jun & Nov. But by Oct, forecasters were warning that demand for oil would grow more slowly than previously anticipated.  The same month, the stock market plunged.  Investors began dumping risk assets, & by the end of the month, oil had plunged about $11 a barrel from its Oct 3 high.  Momentum trading & the rotation out of slumping crude futures & into rising natural gas contracts also deepened losses for oil.  Making matters worse, when the sanctions officially snapped back into place on Iran on Nov 5, Pres Trump surprised the market by granting generous exemptions to the Islamic Republic's biggest customers.  That meant Saudi Arabia, Russia & several other producers had been hiking output into a market where demand growth was moderating & fewer Iranian barrels than expected were lost.  At year-end, the US-China trade dispute remains unresolved, & the market remains concerned that a full-blown trade war between the world's 2 biggest economies will dent fuel demand.  Meanwhile, American crude output is growing more quickly than expected, with the US topping Saudi Arabia & Russia to become the world's biggest producer in H2.

Oil prices just had their worst year since 2015 — here's what went wrong

This year will be long remembered in the stock & commodities markets.  The stock market rally, which seemed like it would never end, at least some though so, ended.  In 2018 the Dow dropped 1400 while NAZ fell more than 300.  Oil had a brutal year but gold & Treasuries, safe haven investments, finished in strong demand.  There are plenty of problems for investors to worry about & volatile trading is still in the cards.  Best wishes for all investors in 2019.

Dow Jones Industrials

No comments: