Monday, January 28, 2019

Markets pull back as trade negotiations with China worsen

Dow tumbled 208, decliners over advancers better than 4-3 & NAZ was off 79. The MLP index dropped 1+ to the 247s & the REIT index added 4+ to 352.  Junk bond funds rose & Treasuries continued slightly higher.  Oil fell 1+ to 52 & gold went up 3 to 1302 (more on both below).

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Concerns over a slowdown in the Chinese economy hung over the stock market as warnings from several top US companies rippled thru the equity exchanges.  Industrial firms took a beating on the weaker than expected earnings from Caterpillar (CAT), a Dow stock, in Q4.  EPS at the firm were $2.55 in the 3 months thru Dec, below expectations & underscored weakness in China.  ‘We are forecasting the overall China market to be roughly flat in 2019 following two years of significant growth,” CEO Jim Umpleby said.  China accounts for as much as 10% of CAT overall sales & the outlook sent the stock tumbling.  The company had its largest one-day decrease since 2011.  It was the worst performer on the blue-chip Dow & the 2nd-worst performer in the broader S&P 500.  The Trump administration is in the midst of negotiations with China over a deal to address the trade deficit between the 2 countries.  A Chinese delegation is expected to visit DC, this week to continue discussions, as key areas, like Beijing's theft of intellectual property & proper enforcement measures, remain unresolved.

China warnings from top US companies ripple through Wall Street

Chinese representatives met with the World Trade Organization to begin the process of legally challenging US tariffs on China's exports.  “This is a blatant breach of the United States’ obligations under the WTO agreements and is posing a systemic challenge to the multilateral trading system,” a Chinese representative said in the meeting.  “If the United States were free to continue infringing these principles without consequences, the future viability of this organization is in dire peril.”  China is seeking to have the WTO block US tariffs on Chinese imports.  Pres Trump's administration last year led the US in putting tariffs on a ¼T$ worth of Chinese imports, at duties of 10-25%.  China responded in kind, placing tariffs on $110B in US goods.  A US representative at the meeting said China was the one “threatening the overall viability of the WTO system,” not the US.  The official said China is using “grossly unfair and trade-distorting forced technology transfer policies and practices.”  They added the claim that “this unfounded dispute” only added to the damage China has caused.

Gold futures settled higher for a 2nd straight session, getting a boost in investor interest from weakness in the US stock market as investor wariness over geopolitical events persists.  The market also awaited the Federal Reserve's latest monetary policy decision, following a 2-day meeting that ends Wed.  Gold for Feb delivery, the contract with the highest cumulative volume, tacked on $5 (0.4%) to settle at $1303 an ounce for its highest finish in about 7 months.  The Apr contract  which boasts significantly higher open interest, added $5.10 (0.4%) to finish at $1309.  Apr gold settled Fri at its highest since Jun.

Gold up a second session on U.S. stock market weakness, geopolitical worries

Oil futures declined, with US prices settling at their lowest in 2 weeks.  Fresh concerns over supply after data late last week showed a hefty weekly rise in the US oil-rig count & the potential for a slowdown in energy demand from China pressured prices.  Traders also continued to look to political developments in Venezuela for their potential impact on production from the South American nation.  Mar West Texas Intermediate oil fell $1.70 (3.2%) to settle at $51.99 a barrel, the lowest for the contract since Jan 14.

Oil futures mark lowest finish in 2 weeks

In its latest projections for the nation's economy & financial situation, the Congressional Budget Office (CBO) indicated the Federal Reserve is likely to continuing its normalization of monetary policy, even if investors don’t like it.  “CBO expects the Federal Reserve to continue to raise the target range for the federal funds rate (the interest rate that financial institutions charge each other for overnight loans of their monetary reserves) in 2019. In CBO’s projections, the rising federal funds rate helps to push up other interest rates in the economy, which, in turn, helps prevent inflation from rising much above 2 percent for any extended time period,” the office said in its 10-year outlook update.  The report does not specify how many times it sees the central bank hiking its benchmark rate.  As things stand, the market is betting that number is zero, while Fed officials indicated in their latest projections released in Jan that they see 2 increases.  However, those same officials lately have stressed that any further actions will come only if the data justify them.  Several members who in the past have been hawkish, or in favor of higher rates, say they now favor a pause while they assess the economic situation.  Projections in the CBO report indicate that GDP is likely to grow 2.3% in 2019 but slow thereafter & settle into a 1.7% level during 2020-23.  That's actually below Fed expectations, which are for a 2.3% gain in 2019 followed by 2% & 1.8% in subsequent years into a long-run trend of 1.9%.  The report notes that the Fed has to guard against an “output gap,” or the difference between actual GDP & its potential.  When the economy is growing faster than its capability, that puts pressure on supplies & thus pushes inflation higher.  The CBO anticipates that the gap will remain positive until 2022, when it turns negative & then subsides.  “A positive output gap indicates that the demand for goods and services temporarily exceeds the economy’s maximum sustainable capacity to supply them, which leads to heightened demand for labor as well as upward pressure on inflation and interest rates,” the report added.

The CBO thinks the Fed is going to raise interest rates this year, disagreeing with Wall St…

This was not a pretty day for stocks.  Late day buying trimmed the losses, but not by much.  The gloomy report from CAT (down 9% today) on the outlook for this year was a major reason for much of today's selling.  The bigger picture is a significant worsening of trade talks with China.  Their economy is stumbling with a reduced rate of growth & that bleeds into American companies.  At the close, the US announced more sanctions on Venezuela.  European growth is stumbling as Britain is attempting to figure out how to handle Brexit.  Chances are the Fed on Wed will give a dovish forecast for rate increases this year which may not bring out many buyers with so many other economic problems.  The Dow is still up 2.7K from the Christmas eve low but stock buyers have grown cautious.  Gold looks attractive in this environment.

Dow Jones Industrials

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