Wednesday, May 29, 2019

Markets sink on fears the trade war could get worse

Dow pulled back 221, decliners over advancers 5-2 & NAZ fell 60.  The MLP index was off fractionally to the 247s & the REIT index retreated 2+ to the 381s.  Junk bond funds slid lower & Treasuries remained in strong demand, bringing the yield on the 10 year note below 2.4% (more below).  Oil dipped into the 58s (more below) & gold added 3 to 1280.

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Yields on gov bonds fell to fresh lows as a deepening rift between the US & China over trade is leading global investors to seek safe assets.  The yield on the benchmark 10-year Treasury note declined to 2.227%, from 2.268% yesterday (the lowest since Sep 2017).

U.S. Treasurys Gain as Growth Concerns Deepen

Markets now expect the Federal Reserve to cut interest rates twice by late Jan as economic signs continue to weaken & the market stumbles thru another rough patch.  Futures trading indicated a 63% chance of a Sep cut & a 62% probability of another easing by late Jan.  The market-implied funds rate is 2.1% by the end of 2019, compared with the current target range of 2.25-2.5% for the Fed's benchmark.  Anticipation for a rate hike comes just a week after minutes from the FOMC meeting earlier this month indicated that members had a strong level of confidence in the economy, with members saying they were even marking up their GDP estimates for the full year.  The meeting summary said no moves would be coming “for some time.”  However, a number of indicators have changed since then, & gov bond yields are pointing to an economic slowdown.  The benchmark 10-year Treasury traded around 2.21% today, not seen since Sep 2017 &, importantly, below the fed funds rate that banks charge each other for overnight lending.  Several points in the bond curve have seen inversions, where shorter-dated debt is yielding higher than securities farther out on the curve, a development that historically has been a reliable recession indicator over the ensuing 12 months.  One key relationship, between the 3-month bill & 10-year note, is now inverted by 14 basis points.  Should the Fed decide to lower rates, it would be consistent in one way with its history.  Since 1983, the average length from the last rate hike to the next rate cut has been 7 months.  The most recent tightening came in Dec, so a move in the other direction for Sep would be a lag time of 10 months.  In their Mar projections, Fed officials indicated no action for rates this year, & multiple policymakers have said they are comfortable with a “patient” approach.

The market now thinks the Fed will cut rates twice by late January

McDonald’s (MCD), a Dow stock & Dividend Aristocrat, CEO Steve Easterbrook said trade tensions between the US & China have “absolutely not” changed its strategy in the Asian country.  “In terms of long-term interest, it’s a very important market for us, and I think will stay that way for as long as I can imagine,” he said.  China is MCD's 2nd-largest market by number of stores, behind only the US.  Easterbrook said having local ownership in China helps “localize” its presence in the country.  In recent months, business in China has slowed down, which he attributed to the country's slowing economy.  And the tariffs flying back & forth between the US & China will likely not help either country's economic growth, according to economists.  While the broader market has felt the impact of the escalating trade war between the US & Beijing, shares of MCD are up 22% over the last year while the S&P 500 has risen 4% in the same period.  “Ultimately, nothing is new to us because we operate in 120 countries around the world,” Easterbrook added.  “There are always going to be issues on a geopolitical level or a macroeconomic issue, and part of our strength is our diversification.”  When it comes to the strength of the consumer overall, Easterbrook said he believes it is in a “fairly decent place. ”  The stock fell 65¢.
If you would like to learn more about MCD, click on this link:

McDonald’s CEO: China will remain an important market for us ’as long as…

US oil futures finished lower, as the prolonged US-China trade dispute continued to weigh on prospects for energy demand.  Prices, however, finished off the session's worst levels ahead of weekly data that are expected to reveal a decline in US crude stockpiles.  The American Petroleum Institute will release its inventory report later today, while the Energy Information Administration (EIA) will release its data early tomorrow.  Analysts expect the EIA to report a decline of 1.4M barrels in crude supplies for last week.  Jul WTI oil fell 33¢ (0.6%) to settle at $58.81 a barrel.

U.S. oil prices end off session lows ahead of weekly U.S. supply data

These are scary times for investors as the trade war worsens.  It looks like China is willing to play hardball & nobody wants that.  There was a lot of selling today, but buyers returned in the last hour to cut the loss for the Dow & kept it above the important 25K level.  Some comfort, but not a lot.  Markets fundamentals don't look good.  Tomorrow the 2nd estimate for Q1 GDP will be released.  Hopefully it will bring some cheer in this gloomy environment for investors.

Dow Jones Industrials

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