Tuesday, December 4, 2018

Markets plunge on growing US-China trade uncertainties

Dow nosedived 799 (closing at the lows), decliners over advancers better than 5-1 & NAZ tumbled a massive 283 (4%).  The MLP index dropped 6+ to the 245s (shown in its dreary chart below) & the REIT index crawled up 1 to 359.  Junk bond funds slid lower & Treasuries were purchased heavily.  Oil slid back into the high 52s (more below) & gold went up a modest 4 to 1243.

AMJ (Alerian MLP Index tracking fund)

Live 24 hours gold chart [Kitco Inc.]

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Pres Trump threatened today to slap more tariffs on China if efforts to strike a trade deal with Beijing crumble.  The world's 2 largest economies reached a 90-day trade truce Sat after Trump & Chinese Pres Xi Jinping met at the G-20 summit.  In a series of AM tweets today, Trump showed optimism about reaching a “fair deal,” but stressed that he is “a Tariff Man” if talks fail.  The administration has sought changes in its trade relationship with China to fix what it calls trade abuses.  The White House has already put $250B in duties on Chinese goods, promising tariffs on a separate $267B if Beijing does not change its practices.  China has imposed duties on about $110B in US products.  The prospect of more tariffs, affecting the Chinese economy & a broader range of American businesses, has sparked concerns about slowing global growth.  Trump says he wants to de-escalate trade tensions with China but insists on Beijing addressing long-standing issues such as intellectual property theft, forced technology transfers, & tariffs & nontariff barriers.  After some confusion yesterday about who would head the talks with China, Trump suggested today that US Trade Representative Robert Lighthizer would take the lead, “working closely with” Treasury Secretary Steve Mnuchin, economic advisor Larry Kudlow, Commerce Secretary Wilbur Ross & trade advisor Peter Navarro.  In his tweets, the pres said his advisors will work on “seeing whether or not a REAL deal with China is actually possible.”  “If it is, we will get it done. ... President Xi and I want this deal to happen, and it probably will,” he added.  Top economists have expressed doubts about the 2 sides reaching a concrete agreement.  Trump again claimed today that more tariffs on China would actually help the US.  He contended that he has made China “pay for the privilege” of raiding “the great wealth of our Nation.”  “We are now taking in $billions in Tariffs. MAKE AMERICA RICH AGAIN,” he tweeted.  Trump has exaggerated the effect of the tariffs on US revenue.  Tariff revenue in fiscal 2018 rose by less than $7B from the previous year, less than 2% of the $3.3T the Treasury collected overall.

'I am a Tariff Man': Trump threatens to restart trade war if China talks fail

Iranian Pres Hassan Rouhani threatened today to close the strait of Hormuz, the world's busiest sea lane for oil shipments, if the US moves to block the Islamic Republic's oil exports.  Pres Hassan Rouhani was quoted as saying: “if someday, the United States decides to block Iran’s oil [exports], no oil will be exported from the Persian Gulf.”  The Trump administration restored sanctions on Iran's energy industry on Nov 5.  The administration is trying to choke off Iran’s economy in order to pressure Tehran to accept tighter restrictions on its nuclear program, cease ballistic missile tests & end its support for US-designated terror groups.  The sanctions have already cut Iran's exports by about 1M barrels per day, but Rouhani is vowing to continue shipping crude.  The Strait of Hormuz is a key waterway for the transport of oil.  In 2016, 18.5M barrels of crude passed thru the waterway, about 1/3 of all seaborne-traded crude oil, according to the Energy Information Administration.  This is not Rouhani's first threat of taking such action.  In Jul, Rouhani made similar comments that raised concerns about a confrontation in the Strait of Hormuz.  The Iranian pres is facing pressure from hardliners to take a more aggressive stance towards the West since Trump withdrew from a 2015 nuclear accord, Rouhani's top foreign policy achievement.  Iran has not made a serious attempt to close the strait since the 1980s.  Iran threatened to shut down the Strait of Hormuz in 2011 & 2012, as Pres Obama marshaled support for intl sanctions on Iran over its alleged research into nuclear weapons development.  Military planners generally acknowledged that Iran has the capability to temporarily close off the waterway, but say the US would be able to quickly reopen the strait.

Iranian president threatens to close key oil trade route if US blocks exports

Oil prices pared gains in volatile trading today as fears flared that demand would stall due to a trade war between the US & China, & as Russia remained a stumbling block to a deal to cut global crude supply.  PresTrump made clear he would revert to tariffs on China if the 2 sides could not resolve their differences.  The comments put a damper on market enthusiasm that drove oil about 4% higher yesterday after Trump & Chinese counterpart Xi Jinping agreed to pause an escalating trade dispute.  Yesterday, expectations of a production cut by the OPEC & its allies, when they meet on Thurs & Fri, had also supported prices.  OPEC & its allies are working towards a deal to reduce oil output by at least 1.3M barrels per day (bpd), informed sources said, adding that Russia's resistance to a significant production cut was so far the main stumbling block.  Intl Brent crude oil futures rose 39¢ to $62.08, after earlier touching a session high of $63.58.  West Texas Intermediate (WTI) crude futures were up 36¢ at $53.31, after gaining as much as 3% at $54.55.  Ahead of the OPEC meeting, Saudi Oil Minister Khalid Al-Falih said it was too soon to be certain that OPEC & other oil exporters would cut production because the terms of a deal remain unresolved.  Falih said he thought the market was oversupplied but he cautioned that all members of OPEC & its allies needed to come together for a cut to go ahead.  Helping OPEC in its efforts to rein in emerging oversupply was an order on Sun by the Canadian province of Alberta for producers to scale back output by 325K bpd until excess crude in storage is reduced.   OPEC's biggest problem is surging production in the US, where output, mostly from its shale fields, has grown by about 2M bpd within a year to more than 11.5M bpd.

US crude rises 30 cents, settling at $53.25, amid trade and output cut uncertainty

The US economy will stay strong in 2019 & inflation will tick up above 2% & so the central bank should continue to raise interest rates gradually, NY Fed Pres John Williams said.  “Given this outlook of strong growth, strong labor market and inflation near our goal and taking account all the various risks around the outlook, I do expect further gradual increases in interest rates will best sponsor a sustained economic expansion,” Williams said.  The Fed's last policy statement used the word “strong” 5 times in describing the US economy, he noted.  “It accurately represents where we are,” he added.  He said growth will slow in 2019, but only a bit, to a 2.5% annual rate from near 3% this year as the Trump tax cut will continue to provide a “tailwind” to activity.  Williams expects the unemployment rate to edge slightly below 3.5% rate over the next year.  The last time the unemployment rate was lower than 3.5% was in 1969.  Inflation will move only a little above the Fed's 2% target, he said.  “Importantly I don’t see any sign of greater inflationary pressures on the horizon,” he added.  Williams is a member of Fed Chairman Jerome Powell’s inner-circle of advisors & gets to vote at every interest-rate meeting.  In keeping with remarks by Powell, Williams stressed that the Fed will evaluate incoming data to gauge the precise stance of policy.  Investors still see an 85% chance the Fed will raise interest rates by a qtr point in Dec.  But the market has growing doubts about the health of the economy, seeing only one rate hike in 2019, well below the Fed's latest projection in Sep of 3 more increases.  The concerns about the outlook as pushed the yield on the 10-year Treasury below 3% this week, the lowest level since early Sep.  Another sign of investor fears is a flattening yield curve, or the spread between short-dated & long-date yields.  Williams said he is alert to signs that the economy may slow faster than he expects, but that his baseline forecast is “still very positive.”  “There are risks on the horizon,” he said.  Not all risks are on the downside, he noted, saying there was a “50%” chance inflation will pick up at a faster pace than he expects.  The Fed is in a good place to react “to whatever the economic news is,” he added.  Williams said his comments are consistent with Powell's recent remark that the Fed's policy rate was "just below"neutral.

Fed’s Williams: ‘Strong’ outlook for 2019 calls for continued interest-rate hikes

Toll Brothers (TOL) gave weaker-than-expected guidance for Q1, pointing to reports about a souring housing market as the cause of the slowdown.  “In November, we saw the market soften further, which we attribute to the cumulative impact of rising interest rates and the effect on buyer sentiment of well-publicized reports of a housing slowdown,” CEO Douglas Yearley said.  Reports of a housing slowdown come as US Census data show new home sales have declined for 11 straight months.  In Oct, sales of newly built homes fell 12% from a year earlier, even though the median price for new homes dropped.  Economists have said the decline in new home sales stems from weakened affordability across US local markets.  The housing market has begun showing signs of cracking this year, while real estate brokers are saying that offers for homes have thinned out.  TOL beat top & bottom line estimates for its Q4 earnings report.  2 of the homebuilder's key metrics, deliveries & backlog, were at the highest levels in more than a decade.  However, Q1 guidance was weaker than expected, with a deliveries range that was markedly below expectation.  Yearley said the company “saw similar consumer behavior beginning in late 2013, when a rapid rise in interest rates temporarily tempered buyer demand before the market regained momentum.”  Known as the taper tantrum, rates jumped in 2013 when the Federal Reserve signaled a reduction of money being put into the economy, leading to a surge in mortgage rates.  Home sales recovered, however, when mortgages rates fell back again.  The stock pulled back a relatively modest 54¢.
If you would like to lern more about TOL, click on this link:

Toll Brothers gives disappointing guidance; CEO blames media for housing slowdown 

There is no disguising the simple fact that this was one of the ugliest days for the Dow in its history.  It finished just above 25K.  Adding to many uncertainties is the US markets will be closed tomorrow, although foreign markets will be open.  Investors know there are a ton of problems out there, starting with trade & prospects for higher interest rates (after many have become addicted to low interest rates in recent years).  For investors interested in the reaction tomorrow, check on the Asian & euro markets, although that looks to be ugly

Dow Jones Industrials

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