Thursday, October 31, 2019

Markets fall over uncertainty about trade deal

Dow dropped 140, decliners over advancers 3-2 & NAZ fell 11.  The MLP index lost 1+ to the 215s & the REIT index pulled back 1+ to the 412s.  Junk bond funds declined in price & Treasuries had a strong rally as stocks were being sold.  Oil fell 1 to 54 & gold rose 16 to 1513 (more on both below).

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Starbucks (SBUX) reported quarterly revenue that topped expectations as cafes in the US & China attracted more customers.  “Our U.S. business delivered 6% comparable store sales growth in the fourth quarter, while China grew comparable store sales by 5% and total transactions by 13%,” CEO Kevin Johnson said.  The coffee chain reported fiscal Q4 EPS of 67¢, up from 56¢ a year earlier.  Excluding the sale of the Tazo brand, Nestle-related transaction costs & other items, EPS was 70¢, in line with estimates.  Net sales rose 7% to $6.75B, topping expectations of $6.68B.  The company reported global same-store sales growth of 5% vs 4% expected.  Both the US & China, its 2 biggest markets, reported strong same-store sales & increasing traffic.  In the US, sales at stores open at least a year increased by 6%, driven by its cold drinks.  During the qutr, SBUX introduced its first new pumpkin coffee drink since the pumpkin spice latte: the pumpkin cream cold brew.  US cafes also grew traffic during all times of the day, for the 2nd consecutive qtr.  Execs attributed US sales growth to investments in its employees, like better benefits & more hours, which in turn leads to higher customer satisfaction scores.  After revamping its loyalty program last qtr, the company counts 17.6M active rewards members in the US.  Johnson said that customers spend more when they join the loyalty program.  In China, despite growing competition from Luckin Coffee & concern about an economic slowdown, SBUX saw same-store sales growth of 5%, as more customers bought its products and spent more.  The coffee chain opened more than 600 net new cafes in China during fiscal 2019 & now has more than 4K locations across the country.  Those new locations include a smaller format cafe with limited seating in Beijing, similar to those developed by Luckin.  SBUX also introduced its fiscal 2020 outlook.  It expects to add 2K net new Starbucks locations worldwide, with continued expansion in the US & China.  It expects revenue growth of 6-8% & global same-store sales growth of 3-4%.  “Our strong performance throughout fiscal 2019 gives us confidence in a robust operating outlook for fiscal 2020,” Johnson said.  The company will spend $1.8B on capital expenditures.  It expects fiscal 2020 adjusted, or non-GAAP, EPS of $3.00-3.05.  Analysts were expecting the coffee chain to report fiscal 2020 EPS of $3.08.  CFO Pat Grismer said in Sep that one-time tax benefits realized in fiscal 2019 would be a headwind & that SBUX bought back $2B worth of shares earlier than originally planned.  The stockwent up 37¢.
If you would like to learn more about SBUX, click on this link:

Starbucks’ stock jumps on strong US and China sales growth

Pres Trump said China & the US are in the process of selecting a new site to sign what he has called phase one of a broader trade agreement between the 2 countries.  Trump had hoped to ink the deal during a Nov summit of nations from the Asia-Pacific Economic Cooperation group in Chile.  But Chilean President Sebastian Piñera announced yesterday that the meeting had been canceled amid widening protests in the capital city of Santiago.

Trump Says U.S. and China Looking for New Site to Sign Trade Deal

Households increased spending headed into the 4th qtr, suggesting consumers have continued to help prop up US economic growth.  Personal-consumption expenditures (household spending) rose a seasonally adjusted 0.2% in Sep from Aug, the Commerce Dept reported.  Outlays rose at a similar pace in Aug after growing more briskly in H1-2019.

U.S. Consumers Stay on a Spending Streak

Chinese Pres Xi Jinping emerged from a Communist Party conclave with a resolute endorsement of his leadership, despite a slowing economy, a bruising trade war with the US & unrest in Hong Kong.  The party's governing Central Committee also signaled a firmer stance on Hong Kong, calling for stronger safeguards for China’s national security in the city—a formulation that some experts say foreshadows new legal powers to squelch dissent against Beijing’s authority.

China’s Communist Party Concludes Conclave in Strong Support of Xi

Gold futures climbed above the key $1500 level to mark their highest settlement in 5 weeks, finding haven-related support from weakness in the US stock market & the $.  A news report that said China officials have doubts over prospects for a long-term trade deal with the US fed declines in US stocks & haven demand for gold.  Gold for Dec rose $18 (1.2%) to settle at $1514 an ounce.  That was the highest most-active contract finish since Sep 26 & largest one-day $ & percentage climb since Oct 2.  Chinese officials are expressing doubts about their ability to reach a comprehensive, long-term trade deal with the US despite progress toward signing a “phase one” agreement.  A report said Chinese officials have concerns about Pres Trump's impulsive nature & fear he could even back out of the limited deal that both Beijing & DC have signaled they want to sign in coming weeks.

Gold climbs back above $1,500 to settle at a 5-week high

Oil futures declined to settle at their lowest in over a week, with US prices down a 4th session in a row but holding on to a modest gain for the month.  Worries about the global economic backdrop were back in focus for oil traders, with prices declining after a round of lackluster factory data out of China & a news report that said Chinese officials have doubts over prospects for a long-term trade deal with the US.  West Texas Intermediate crude for Dec fell 88¢ (1.6%) to settle at $54.18 a barrel.   Prices fell a 4th straight session and marked their lowest finish since Oct 22.  For the month, prices rose 0.2%.  Global benchmark Dec Brent crude declined 38¢ (0.6%) to end at $60.23 a barrel, also the lowest since Oct 22.  The contract, which expired at the day's settlement, posted a gain of 0.9% for the month.  Jan Brent crude, which became the front month, lost 62¢ (1%) at $59.62 a barrel.  China’'s official gauge of factory activity, the manufacturing purchasing managers index, fell to an 8 month low of 49.3 in Oct from 49.8 in Sep, the National Bureau of Statistics said.  A reading of less than 50 for the survey-based index indicates a contraction in activity.  The downbeat economic worries raised concerns over a slowdown in energy demand.  Oil futures settled lower on Wed after the Energy Information Administration reported a larger-than-expected increase in US crude inventories.

Oil prices fall to lowest finish in over a week, but cling to a modest monthly climb

After a rough start, the Dow finished the month with a gain of 130.  Not bad in a month that has seen some of worst daily declines in history.  The status of the US-China trade deal is on hold.  Traders are looking for the gov to find a substitute location for the 2 sides to meet & sign a deal (phase I).  Until there is clarity, the bears will be in charge of the stock market.

Dow Jones Industrials

Markets retreat on trade war concerns

Dow sank 235, decliners over advancers 2-1 & NAZ dropped 48.  The MLP index slid back 2+ to the 214s, another multi year low, & the REIT index was fractionally lower to the 413s.  Junk bond funds puled back & Treasuries rose in price.  Oil fell 1+ to the 53s & gold jumped 18 to 1515 on news of postponement for the US-China trade deal..

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CL=FCrude Oil54.44
  -0.62 -1.1%

GC=FGold   1,512.20

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Stocks opened lower after Beijing raised doubts about the prospects of a long-term trade deal with the US.  Chinese officials have warned they won't budge on some of the most contentious issues between the 2 countries.  They remain concerned about Pres Trump's impulsive nature & the risk he may back out of even the limited agreement both sides say they want to sign in the coming weeks.  The S&P 500 closed at a record on high yesterday after investors welcomed the Fed's 3rd rate cut of the year, to 1.5-1.75%, as the central bank looks to shore up economic growth amid a bruising US-China trade war.  The Fed indicated it won't cut rates again unless the outlook worsens.  Also, the Commerce Dept said the US economy grew at a 1.9% rate in Q3, a stronger performance than expected.  The next big economic indicator comes tomorrow when the gov releases the monthly nonfarm payroll report.  Overnight, a monthly gauge of Chinese factory activity declined more than expected for Oct amid weak consumer demand & a tariff war with DC, sending China's Shanghai Composite down 0.3%.  Hong Kong lsid into recession for the first time in a decade in Q3.  The economy shrank 3.2% from the preceding period, contracting for a 2nd straight qtr & meeting the technical definition of a recession, according to preliminary gov data.  Tokyo's Nikkei ended the day up 0.4% & Hong Kong's Hang Seng finished the session with a 1% gain.  In European markets, London's FTSE fell 1%, Germany's DAX dropped 0.6% & France's CAC slipped 0.5%.

Stocks slip as China throws a wrench in Trump's trade war plans

Pres Trump said the US & China will announce a new site soon for the signing of the "phase one" trade deal that the 2 countries agreed to earlier this month.  The 2 sides had planned to sign the deal at the Asia-Pacific Economic Cooperation summit in mid-Nov, but Chile announced yesterday it will no longer host the event because of massive protests of gov policy.  It is unclear where & when the event will be held now.  "China and the USA are working on selecting a new site for signing of Phase One of Trade Agreement, about 60% of total deal, after APEC in Chile was canceled do to unrelated circumstances," Trump tweeted.  "The new location will be announced soon. President Xi and President Trump will do signing!"  White House Deputy Press Secretary Hogan Gidley said that deputy-level talks are happening every day.  "While APEC was canceled yesterday, it has not negatively impacted our conversations with China at all," Gidley said.  "In fact, I spoke with the trade team this morning, the great Larry Kudlow ... and he just told me, these talks are going very smoothly."  Chinese Vice Premier Liu He is expected to speak by phone with Trade Representative Robert Lighthizer & Treasury Secretary Steve Mnuchin tomorrow, Gidley said.  Trump said yesterday that the 2 countries are "ahead of schedule" on signing the agreement, & Beijing said on Sat that phase one was "basically complete."  Trump's tweet indicated that the "phase one" agreement is around 60% of the total deal with China.  White House trade official Peter Navarro has previously said there would be 3 phases in the total deal.

Trump reveals progress on China trade deal and one major hangup

The US-China trade war is taking a toll on the Chinese economy, but a long-term deal may be elusive as long as Pres Trump occupies the White House, according to a report.  Beijing is reluctant to give in on some of the biggest stumbling blocks due to Pres Trump's unpredictability and the possibility that he would back out of any deal, according to people familiar with the matter.  It should be noted, however, that it was Beijing that reneged on a deal earlier this year.  While not named, key US issues in the trade dispute, which Trump ignited with tariffs on Bs in Chinese imports, include intellectual property theft, greater access to Chinese markets & the trade imbalance between the 2 countries.  Hesitance in Beijing, which has called for the removal of all US levies, follows a fiery speech from Secretary of State Mike Pompeo yesterday.  He said the US must “confront challenges” from Beijing “head-on,” adding that China is engaging in unfair & predatory economic tactics.  The US & China remain in close contact, & leaders will hold a call on Fri as negotiators hammer out the details of a 'phase one' trade agreement, which both sides hope to sign next month at the Asia-Pacific Economic Cooperation summit.  Trump has said a comprehensive trade deal might require 2 or 3 phases.  The summit was planned in Santiago, Chile, but the country's gov pulled out because of massive protests of gov policy.  It is unclear where & when the event will be held now.  The longer Beijing waits to give in on key issues, the more damage will be done to the Chinese economy.  China's GDP grew at a 6% rate in Q3, the weakest in 26 years.  Manufacturing activity, which accounts for about 40% of China's GDP, showed further deterioration in a report released today.  The Purchasing Managers Index fell deeper into contraction, with a print of 49.3 in Oct, as new export orders fell for a 17th straight month.  It was the 6th straight month the sector has shrunk.  Total new orders fell back into contraction after a brief spurt of expansion in Sep, signaling domestic weakness as well.  Additionally, Hong Kong, an entry point into the Chinese market for many global investors, has slipped into recesson with GDP contracting by 3.2% in Q3 amid the trade war & pro-democracy protests.  Weakness is expected to persist at least thru the end of the year.  The US today put forth an olive branch to Beijing by extending exemptions on the 2nd batch of tariffs – 25% on $34B of Chinese goods – that were enacted in Jul 2018.  As part of the framework of the phase one deal, the US agreed to not raise existing duties on $250B goods from 25% to 30% on Oct 15.  A decision has not yet been made on tariffs on $160B scheduled for Dec 15.

US-China trade deal: Beijing's doubts about 'unpredictable' Trump snarl prospects

Pres Trump said a new location for signing the “phase one” US-China trade deal will be announced soon after the initial gathering in Chile was canceled due to protests.  “China and the USA are working on selecting a new site for signing of Phase One of Trade Agreement, about 60% of total deal, after APEC in Chile was canceled do to unrelated circumstances,” Trump tweeted.  “The new location will be announced soon. President Xi and President Trump will do signing!”  Trump said in his tweet that the “phase one” trade deal represents the majority of a long-term agreement.  His comment came after a reported today said that China is doubtful about reaching a comprehensive trade deal with the US due to Trump’s “impulsive nature.”  Earlier this month, Trump said the US has come to a “very substantial phase one deal” with China, adding phase 2 will start “almost immediately” after the first phase is signed.  Trump had said the agreement would address issues such as intellectual property & financial services & include a pledge for China to buy $40-50B in American agricultural products.  The limited deal also includes a pause in tariff escalation as the US ditched a planned tariff hike on $250B in Chinese goods set to take effect Oct 15.  However, many experts had said the “phase one” deal represents a much smaller portion of what Trump originally set out to pursue.

Trump says new location for signing of ‘phase one’ of US-China trade deal will be announced soon

Excitement about the interest rate cut by the Fed is over & trade issues are on the front burner.  Markets are trading much lower & the outlook is glum with cancellation of China trade talks.  However, earnings are generally looking good & the US economy is doing well under the circumstances which is keeping the stock indices very close to record highs.

Dow Jones Industrials

Wednesday, October 30, 2019

Higher markets after the Fed cuts interest rates ¼ percent

Dow went up 115, advancers slightly ahead of decliners & NAZ gained 27.  The MLP index gave back 1+, falling to 217 (more than 11 year low), & the REIT index added 1+ to the 413s.  Junk bond funds fluctuated & Treasuries were bid higher.  Oil dropped to the 54s & gold rose 4 to 1498 (more on both below).

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The Federal Reserve cut interest rates by a qtr-percentage point for the 3rd time this year to cushion the economy against the US-China trade dispute & a global growth slowdown, but signaled that it was pressing pause on future easing.  During its 2-day meeting, the FOMC voted, as expected, to ease the benchmark federal funds rate by 25 basis points to 1.5-1.75%.  8 of the 10 officials voted in favor of lowering rates, with Boston Fed Pres Eric Rosengren & Kansas City Fed Pres Esther George dissenting from the decision.  This was the 3rd cut this year, part of a "mid-cycle adjustment" that began in Jul in order to preserve the 11-year economic expansion.  Although the central bank did not fully close the door to further action, it hinted that it will wait & see before lowering the benchmark federal funds rate again.  "We believe monetary policy is in a good place," Chair Jerome Powell said.  The Fed replaced a key phrase that had appeared in its policy statement all summer saying it was committed to "act as appropriate" to sustain the economic expansion.  In its place was slightly more hawkish language.  "The committee will continue to monitor the implications of upcoming information for the economic outlook as it assesses the appropriate path of the target range for the federal funds rate," the statement said.  Powell said policymakers believe the current stance of policy will remain appropriate, so long as the economic outlook, including the strong labor market & solid consumer spending, stay the same.  He pointed to mitigated risks, like the US & China inching closer toward signing phase one of a trade deal and the reduced risk of a hard Brexit.  "That has the potential for being an improvement in the risk picture," he said.  However, Powell stressed that if developments emerged that cause a material reassessment of the bank's outlook, "we would respond accordingly."  "Policy is not on a preset course," he added.  The Fed said the economy is growing at a "moderate" pace boosted by a strong labor market, but business investments are weak & "uncertainties" about the outlook remain.  It expects growth to cool slightly this year & next to around 2%.  The decision comes the same day the government reported Q3 GDP growth of 1.9%; though slower than previous qtrs, it topped the annualized 1.6% forecast.  For consumers, lower interest rates — which affect borrowing costs, including auto loan rates & 30-year-fixed mortgage rates — can mean thousands of $s in savings.

Fed cuts interest rates for third time, but hits pause on future action

Demand for mortgages increased in the past week even as mortgage rates rose to the highest in 3 months.  Mortgage applications rose 0.6% in the past week, according to the Mortgage Bankers Association's Weekly Mortgage Application Survey.  Mortgage rates increased for the 2nd straight week with the 30-year fixed rate climbing to 4.05%, the highest level since the end of Jul.  The seasonally adjusted purchase index rose 2% from last week, the highest level since the end of Jul.  The refinancing index decreased 1% from the previous week & was 134% higher than the same week a year ago.  The refinance share of mortgage activity accounted for 58% of total applications, slipping from 58.5% in the prior week.

Applications for new mortgages rose despite higher mortgages rates

Treasury Secretary Steve Mnuchin said that it will take time for Chinese purchases of US agricultural goods to “scale up” to the $40-50B annual level touted by Pres Trump if the 2 sides can seal a “Phase 1″ trade deal.  Mnuchin added in Saudi Arabia that the $40-50B target is “a lot,” but is based on “very specific discussions” of product purchase commitments by China.  “This is built on a bottom-up basis of both what we think we can deliver and what they think they need,” Mnuchin said.  “It’s a one-year target, but obviously it’s going to take some time to scale up.”

Mnuchin says agricultural sales to China will ‘take time to scale up’ to $40-50 billion

Gold futures settled higher, after posting back-to-back declines, then headed lower after the Federal Reserve cut its benchmark interest rate but said it would monitor the economic outlook as it assesses its next decision on rates.  The Federal Reserve cut its benchmark interest rate, by a qtr percentage point to 1.5-1.75%.  The central bank signaled it may pause to see whether these easing steps are enough to sustain the economic expansion.  In electronic trading shortly after the Fed news, gold for Dec traded at $1490 an ounce.  Before the decision, prices for the contract had climbed $6 (0.4%) to settle at $1496 an ounce.  The yellow metal had briefly trimmed some of earlier gains after data showed Q3 GDP expanded at a 1.9% annual pace, slowing from 2% in Q2 but coming in above the average forecast by economists for growth of 1.6%.  The GDP data had reinforced expectations the Fed will seek to cool expectations for additional rate cuts.  Traders have already scaled back bets for further interest-rate reductions later this year & in 2020.  Fed monetary policy easing is seen as a positive for gold for a variety of reasons, including downward pressure on bond yields, which reduces the opportunity cost of holding non-yielding assets like commodities . Lower interest rates can also put pressure on the $, making gold & other commodities priced in the product less expensive to users of other currencies.

Gold settles higher after back-to-back declines, then falls after Fed decision

Oil futures ended at their lowest in just over a week after the Energy Information Administration (EIA) reported a larger-than-expected weekly US crude-supply increase of almost 6M barrels, but gasoline inventories declined a bit more than forecast.  West Texas Intermediate crude for Dec fell 48¢ (0.9%) to settle at $55.06 a barrel.   Front-month Dec Brent crude, which expires tomorrow, fell 98¢ (1.6%) to $60.61 a barrel.  Both crude benchmarks marked their lowest settlements since Oct 22.  The EIA reported that US crude supplies rose by 5.7M barrels last week.  Crude supplies were forecast to increase by 2.5M barrels.  The American Petroleum Institute released its data to media today, revealing a weekly fall of 708K barrels in crude inventories.  The market saw conflicting API data from secondary sources yesterday, when the API issued its figures to its members.

Oil prices end at 1-week low as EIA shows nearly 6 million-barrel weekly rise in U.S. supplies

The news from the Fed was not surprising.  There was one more rate cut & future events will define if it's necessary for more cuts.  However, the big news is the cancellation of the intl meeting in Chile which raises doubts about signing phase 1 of the trade deal with China.  The negotiators are undoubtedly looking for alternatives so the deal can move forward.  The Dow shot up 100 after the rate cut news, coming closer to setting a new record.

Dow Jones Industrials