Wednesday, January 9, 2019

Markets rise on hopes for easing US-China trade tensions

Dow went up 91, advancers over decliners about 2-1 & NAZ added 60.  The MLP index went up 2+ to the 251s & the REIT index gained 6+ to the 335s.  Junk bond funds continued to be in demand & Treasuries slid lower.  Oil jumped 2+ to the 52s (more below) & gold added 6 to 1292 as it nears 1300.

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Federal Reserve officials acknowledged that the policy path ahead is “less clear” after approving an interest rate hike at their most recent meeting.  Minutes released from the FOMC gathering in Dec showed the rate hike came with reluctance from a few members who thought the lack of inflationary pressures argued against another increase.  The officials agreed that “some further gradual increases” in the benchmark funds rate would be appropriate.  What that would translate to in practical terms, though, became less clear for a central bank that only a few months earlier was pointing to 4 hikes in 2019.  The minutes noted that the low-inflationary backdrop means the Fed can “afford to be patient about further policy firming.”  The Fed hiked its benchmark rate a qtr point to 2.25-2.5%, the 4th increase in the year & the 9th since policy normalization began in Dec 2015.  “With an increase in the target range at this meeting, the federal funds rate would be at or close to the lower end of the range of estimates of the longer-run neutral interest rate, and participants expressed that recent developments, including the volatility in financial markets and the increased concerns about global growth, made the appropriate extent and timing of future policy firming less clear than earlier,” the summary stated.  The indecision was reflected in rate forecasts among individual members.  Officials cut their expected moves this year from 4 to 2, citing a range of concerns about growth & volatility in the financial markets.  “Concerns over escalating trade tensions, global growth prospects, and the sustainability of corporate earnings growth were among the factors that appeared to contribute to a significant drop in U.S. equity prices,” the minutes said.  The misgivings about future policy came before recent public statements from Fed officials echoing a softening course.  Fed Chairman Jerome Powell, in remarks on Fri, said policymakers will be “patient” when approaching policy decisions.  As reflected in the minutes, sentiment among Fed officials is that the economy remains strong, but they're attuned to downside risks that the market perceives.  Among those cited most prominently were “the possibilities of a sharper-than-expected slowdown in global economic growth, a more rapid waning of fiscal stimulus, an escalation in trade tensions, a further tightening of financial conditions, or greater-than-anticipated negative effects from the monetary policy tightening to date.”  The minutes noted that “a number” of members believe the Fed should assess how those risks “that had become more pronounced in recent months might unfold” & how they would impact economic activity. Also, these officials called for a look into how the impact the Fed’s actions were having as they are “still working their way through the economy.”  A member also emphasized that policy is “not on a preset course,” that data would dictate further actions & that “the ultimate endpoint of future rate increases” was still unknown.  “If incoming information prompted meaningful reassessments of the economic outlook and attendant risks, either to the upside or the downside, their policy outlook would change,” the minutes said.

Fed ‘can afford to be patient’ about future rate hikes, FOMC minutes show

Oil prices ripped higher again, rebounding from a pullback on bearish US stockpile data after Saudi Arabia reassured the market that its oil &production & exports are falling sharply.  The oil market also drew support from talks between the US-China aimed at preventing an all-out trade war.  The market fears the dispute between the world's 2 biggest economies could slow global growth & weigh on fuel demand.  US West Texas intermediate crude surged 5% to a nearly one-month high at $52.58.  The contract ended yesterday up $2.58 (5.2%) to $52.36.  Intl benchmark Brent crude was up $2.55 (4.3%) at $61.27.  After tumbling more than 40% over nearly 3 months, oil prices have risen by about 17% during an 8-day rally.  Saudi Energy Minister Khalid al-Falih said the kingdom will meet its goal of reducing output to 10.2M barrels per day this month, down about 900K bpd from record Saudi output in Nov.  Saudi Arabia will export 7.2M bpd in Jan & 7.1M bpd in Feb, according to Falih.  The comments offer further evidence that OPEC & its oil market allies, including Russia, are cutting production following an oil price collapse late last year.  Led by Saudi Arabia, the producers have vowed to keep 1.2M bpd off the market starting this month.  Falih said he believes the production cuts will balance the market, but won't rule out taking further action if supply starts to outstrip demand again.

US crude surges 5.2%, settling at $52.36, on Saudi output cuts and US-China trade talks

Saudi Arabia's massive oil & gas reserves are even bigger than previously reported, according to an outside assessment commissioned by the kingdom.  The independent audit not only revised Saudi reserves higher, but may help put to rest skepticism over the nation's oil & gas wealth, which has persisted in some corners of the market for years.  It also shows national oil giant Saudi Aramco is taking strides towards transparency as it continues to consider a stock market debut.  Saudi Energy Minister & Aramco Chairman Khalid al-Falih said the kingdom expects the IPO for Aramco to take place in 2021, following a delay.  State-controlled Aramco had 263B barrels of oil waiting to be tapped at the end of 2017, according to petroleum consulting firm DeGolyer & MacNaughton.  That is 2.2B barrels more than Aramco reported in its last annual review.  Aramco's natural gas reserves total 319T cubic feet.  The company, which is not a major player in the gas market, previously reported 302T cubic feet of gas reserves.  Saudi Arabia has additional reserves in an area along the border with Kuwait that has sat idle due to a dispute between the neighbors.  Including this Neutral Zone, Saudi oil reserves total 268B.  That compares with an earlier estimate of 266B barrels.

Saudi Arabia’s massive oil reserves total 268.5 billion barrels, even bigger than previously known

The Federal Reserve is likely to “eventually” push interest rates up slightly into restrictive territory if the dark clouds over the outlook clear up, said Chicago Fed Pres Charles Evans.  “If the downside risks dissipate and the fundamentals continue to be strong, I expect that eventually the fed-funds rate will rise a touch above its neutral rate — say up to a range between 3% and 3.25%,” Evans said.  That's higher than the median Fed forecast of a “neutral” 2.75% long-run neutral interest rate.  Evans is projecting 3 more qtr-point rate increases “eventually.”  The Fed has penciled in 2 moves in 2019.  Investors are pricing in no interest rate moves this year.  On the timing of future moves, Evans suggested the Fed could afford to wait for 6 months to see how things play out.  “I think developments in the first half of 2019 will be very important for making this assessment of our future monetary policy actions,” Evans said.  “Hopefully, the economic data will be more like the strong December employment report and financial market volatility will settle down,” Evans added.  The Chicago Fed pres is a voting member of the central bank's interest-rate committee this year.  It was clear that other Fed officials do not share Evans' relatively hawkish views.

Fed’s Evans says interest rates likely moving higher while others urge caution

There were no official announcements following US-China trade talks, but a lot of optimism is priced into the stock market.  Meanwhile the partial gov shutdown is pinching harder while both sides dig in for a long fight.  The Dow had a big selloff early in the session followed by a recovery.  The last 2 hours were very choppy from increased nervousness about the trade talks.  Gold continues to be in demand by investors with worries.

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