Tuesday, May 7, 2019

Markets plunge after disarray in trade talks

Dow tumbled 473 (near session lows), decliners ahead of advancers about 5-1 & NAZ pulled back 159.  The MLP index fell a fraction to the 246s & the REIT index sank 7 to the 374s.  Junk bond funds were mixed & Treasuries continued strong with the yield on the 10 year Treasury falling below 2.45%.  Oil was off almost 1 to the 61s & gold added 3  to 1286 (more on both below).

AMJ (Alerian MLP Index tracking fund)

Efforts to end a US-China trade war are in shambles after the US accused China of reneging on its commitments & prepared to raise import taxes on $200B worth of Chinese goods.  A Chinese delegation is headed to DC to salvage talks aimed at resolving a dispute over China's aggressive push to challenge American technological dominance.  Negotiations are set to resume Thurs.  The setback in negotiations caught financial markets by surprise & US stocks fell today for the 2nd straight day.  For weeks, Trump administration officials had suggested that negotiators were making steady progress.  China confirmed today its economy czar, Vice Premier Liu He, will lead China's delegation, ending speculation that he'd skip the talks or that the Chinese team would back out altogether.  The announcement suggests Pres Xi Jinping's gov is putting its desire to end a conflict that has battered Chinese exporters ahead of the political need to look tough in the face of US pressure.  The decision to have Liu take part in talks might keep alive hopes the 2 biggest global economies could make peace as early as this week.  The Trump administration is pressing Beijing to roll back plans for gov-led development of Chinese global competitors in robotics, electric cars & other technologies.  The US, Europe, Japan & other trading partners say those violate China's market-opening commitments & are based in part on stolen technology.  Trump's announcement Sun that he would increase tariffs on $200B of Chinese imports to 25% from 10% on Fri caused global stock markets to plunge.  Markets steadied after a Chinese spokesman said yesterday that envoys still were preparing to go to the US, though there was no word then whether Liu would take part.  Today, China's main stock market index rose 0.7% & most other Asian markets also rebounded.  The American side is led by Trade Representative Robert Lighthizer & Treasury Secretary Steve Mnuchin.  A Commerce Ministry statement announcing Liu's plans gave no indication whether other details, such as the size of his delegation, might change.

Chinese team heads to Washington to salvage trade talks

Consumer borrowing growth slowed in Mar, according to the Federal Reserve.  Total consumer credit increased $10.3B.  That's an annual growth rate of 3.1%, down from a $15.4B gain or 4.6% rise, in the prior month.  The forecast had called for a $16.5B gain in Mar.  Yesterday, the Fed's latest report on financial stability said the level of household borrowing was not excessive.  "Household borrowing remains at a modest level relative to incomes, and the debt owed by borrowers with credit scores below prime has remained flat," the report said.

U.S. consumer credit grows $10.3 billion in March, down from $15.4 billion in February

If inflation runs near but doesn't meet the Federal Reserve inflation target, the central bank should be satisfied, a top official of the US institution said.  “I don’t share the concern, that some have, that if we’re at 1.8% inflation for a significant period of time, that this is a problem that needs to be fixed. From my point of view, 1.8 is 2,” Fed Vice Chairman for Supervision Randal Quarles said.  His view is a more hawkish viewpoint relative to some of his colleagues at the central bank.  More dovish Fed members, like Chicago Fed Pres Charles Evans, have argued that inflation below the Fed's target leads to even lower inflation & weak economic outcomes.  It should be noted that the inflation rate isn't even the 1.8% hypothetical Quarles suggested.  In Mar, the Fed's preferred inflation measure, the personal consumption expenditure price index, grew 1.5% over 12 months.  Core PCE prices rose 1.6% over that time period.  The Fed has missed its 2% inflation target, as measured by its preferred personal consumption expenditure price index, on an annual basis every year since 2012.  Core PCE has averaged 1.6% over the last 7 years.  In his discussion on monetary policy, Quarles argued that if inflation is running at a 1.8% rate, economists can't measure inflation precisely enough to know that it might not be at the 2% target.  “I would not undergo heroic efforts, including re-thinking our monetary policy framework, or significant monetary policy stimulus, in order to edge 1.8% up to 2%,” he said.  If the inflation rate sank to a 1% rate, “then you would have a different issue,” he noted.  Investors don't show much concern about high inflation.  The yield on the 10-year Treasury note is off about 73 basis points from the 52-week high hit last Nov.  Market-based measures of inflation expectations imply the Fed will miss its inflation target for the next 5 years, noted St Louis Fed Pres James Bullard earlier this year.

Fed’s Quarles says he could live with an inflation rate that is below the 2% target

Gold futures ended higher as US benchmark stock indices freshly retreated amid apparent challenges for US-China trade talks this week, negotiations that markets had generally believed to be all but signed on the dotted line.  Gold for Jun delivery tacked on $1.80 to settle at $1285 an ounce after tapping a low of $1279.  Prices registered a slim 0.2% gain yesterday.  US stocks finished lower yesterday, but recouped deeper losses.  Stocks declined sharply again today with attention still fixed on trade talks.  US Trade Representative Robert Lighthizer said yesterday that the Trump administration will increase tariffs on $200B in Chinese goods early Fri.  The prospect of higher tariffs had been first raised on Sun by Pres Trump, rattling investors who had anticipated that better progress toward a near-term resolution between the 2 superpowers.  But Treasury Secretary Steve Mnuchin, along with Lighthizer, told reporters that the US administration was made aware over the weekend that China was trying to back away from “some of the language” that had been hammered out in prior talks.  US officials said that tariffs on those Chinese goods will rise to 25% from 10% at 12:01 AM Eastern time Fri.

Gold ends higher on U.S.-China trade-induced jitters

Crude-oil prices fell, but settled off the session's worst levels as increasing tensions between the US & Iran & the threat of disruptions to supplies in the Middle East helped to offset worries that a protracted trade conflict between the US & China will hurt energy demand.  The US will deploy 4 B-52 bombers to the Middle East, in response to what the Trump administration said are threats of a possible attack by Iran on American troops in the region.  West Texas Intermediate crude for Jun delivery lost 85¢ (1.4%) to settle at $61.40 a barrel, after touching an earlier low of $60.66.  Prices posted the lowest front-month contract finish since Mar 29.  Global benchmark Jul Brent crude dropped $1.36 (1.9%) to finish at $69.88 a barrel, the lowest front-month contract settlement since Apr 4.  It settled yesterday up 0.6%, on ICE Futures Europe.

Oil prices fall on U.S.-China trade spat, but settle off lows as U.S.-Iran tensions worsen

Chaos has become the main emotion for traders.  The US-China  trade talks are stuck in the mud after recent encouraging words from US negotiators.  Following heavy selling at the opening, potential buyers went home & the averages kept sinking until bargain hunters returned in the last ½ hour to limit the losses.  Today was one of the ugliest days in history for the stock market & more selling is in the cards.

Dow Jones Industrials


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