Wednesday, February 19, 2020

Markets rise after Fed minutes are released from January meeting

Dow went up 115 (not far from session highs), advancers over decliners 3-2 & NAZ climbed 84 as it nears 10K.  The MLP index was off 1 to 200 & the REIT index tumbled 5+ to the 428s.  Junk bond funds hardly budged & Treasuries drifted a little lower in price.  Oil shot up 1+ to the 53s & funds rose 8 to 1612 (more on both below).

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Gold prices rallied to a near 7-year high as the coronavirus outbreak & its potential economic consequences prompted speculation that central banks would lower interest rates later this year.  The precious metal, typically viewed as a reliable value holder when rates are falling, closed up 0.5% at $1607 an ounce after a high of $1614 earlier in the session.  It has gained about 6% so far this year.  The People's Bank of China has already cut both short- & medium-term interest rates & injected 1.2T yuan ($236B) into money markets in an effort to cushion the blow from the coronavirus.  The outbreak has led to the lockdown of more than 60M in the country & caused scores of businesses to temporarily shutter stores or reduce hours.  The slowdown in China is expected to provide a 0.4 percentage-point drag on US economic growth, which coupled with Boeing's (BA), a Dow stock, 737 Max production freeze could temporarily shave almost 1 percentage point from GDP. 

Gold hits 7-year high as coronavirus reshapes markets

Though the coronavirus had just taken hold when the Federal Reserve met in Jan, officials already expressed concern about its potential economic impacts.  “The threat of the coronavirus, in addition to its human toll, had emerged as a new risk to the global growth outlook, which participants agreed warranted close watching,” minutes released from the Federal Open Market Committee's Jan 28-29 meeting said.  Central bank policymakers said, for instance, that if the virus spread it could hit what appeared to be an improving growth picture in China.  The minutes noted that “early GDP releases showed a pickup in growth in China and some other Asian economies, though news of the coronavirus outbreak raised questions about the sustainability of that pickup.”  Officials also cited the potential impact on stocks, though the market has been performing well.  Negative headlines about the virus have caused some volatility.  “Late in the period, concerns about the spread of the coronavirus and uncertainty about its potential economic effect weighed negatively on investor sentiment and led to moderate declines in the prices of risky assets,” the minutes added.  Officials also commented on the impact the disease had on China's currency, which had been appreciating but tailed off as the news cycle intensified.  Those statements come amid continuing concern about the virus not only as a health threat but also as an economic one to a global growth picture that has been wobbly.   IMF Managing Director Kristalina Georgieva called the COVID-19, outbreak the “most pressing uncertainty” in the world now.

Fed calls the coronavirus a ‘new risk to global growth outlook’

Federal Reserve officials expressed confidence at their most recent meeting about the state of the US economy & figured interest rates likely would remain unchanged for a while, according to minutes.  That comes even as financial markets are pricing in a near-certainty of at least one cut this year & possibly 2.  The central bank's policymaking group voted at the Jan meeting to leave its benchmark overnight funds rate of 1.5-1.75%.  In coming to that decision, Federal Open Market Committee members noted that the outlook for the economy had gotten “stronger” just since the previous forecast in Dec.  Officials did make several mentions of possible dangers from the coronavirus, though the spread of the disease had just become an issue at the time of the meeting.  “They expected economic growth to continue at a moderate pace, supported by accommodative monetary and financial conditions,” the minutes said.  “In addition, some trade uncertainties had diminished recently, and there were some signs of stabilization in global growth. Nonetheless, uncertainties about the outlook remained, including those posed by the outbreak of the coronavirus.”  Holding the line on rates “would give the Committee time for a fuller assessment of the ongoing effects on economic activity of last year’s shift to a more accommodative policy stance and would also allow policymakers to accumulate further information bearing on the economic outlook.”  The FOMC cut rates 3 times in 2019 but did not move in its next 2 meetings.  Though traders lately have been pricing in a high chance of another cut by Sep & about a 50-50 chance of an additional move lower by the end of the year, the minutes noted that “current stance of monetary policy was appropriate.”  However, officials did note risks.  While stating that the easing of trade tensions would help, some members said they thought the US-China deal’s impact “would be relatively limited” as many tariffs remain in place & further tensions could flare up.  The minutes said policy would remain flexible if conditions change.  In addition to discussion about near-term issues, the meeting featured an ongoing review over the long-term direction of policy.  Markets have been watching Fed communications for indication on inflation — specifically how the central bank will meet its target of 2%.  Members discussed 3 scenarios involving ranges for inflation that would indicate the Fed would be willing to tolerate a rise above or fall below the target for a period of time.  The post-meeting statement tweaked language to indicate that the Fed wants inflation “returning to” 2% rather than “near” it as previous statements had indicated.  The minutes stated that the Fed likely will finalize its strategy by midyear.

Fed officials feel rates are likely to stay where they are, minutes show

Oil futures posted their highest settlement in nearly 3 weeks, with Brent oil tallying 7th straight session advance.  The US imposed sanctions on an arm of Russian oil giant Rosneft, raising some oil-supply concerns & the reported number of new daily cases of China's coronavirus declined, easing worries about the disease's impact on the economy and on energy demand.  Yestereday, the Trump administration blacklisted the trading brokerage owned by Russia's Rosneft that the US accuses of helping the regime of Venezuelan Pres Nicolás Maduro.  Venezuela is already under severe US sanctions as the Trump administration intensifies its campaign to remove Maduro from power.  Against that backdrop, West Texas Intermediate crude for Mar rose $1.24 (2.4%) to settle at $53.29 a barrel, after ending yesterday's session unchanged.  The Mar contract expires at tomorrow's settlement.  Apr Brent crude, meanwhile, picked up $1.37 (2.4%) to $59.12 a barrel, its 7th straight gain.  Both benchmark logged their highest settlements this month.  Investors also kept an eye on conflict in Libya, as its UN-recognized gov withdrew from peace talks in Geneva after an attack by rebel forces led by Khalifa Haftar.  Production in the oil-rich region remains impeded due to the Libyan conflict, sources said.  Combined with signs of slowing transmission of COVID-19—the infectious illness derived from the novel strain of coronavirus—crude-oil markets have been tilting higher.  Saudi Arabia's Energy Minister Prince Abdulaziz bin Salman equated the impact of coronavirus on oil with a burning house.  As of yesterday, China’s National Health Commission said there had been 75K confirmed cases & 2K deaths, but investors have taking heart in a slowing pace of reported infections.

Crude-oil prices settle at a nearly 3-week high

Federal Reserve Bank of Minneapolis Pres Neel Kashkari said that he sees no reason for the central bank to change its interest rate policy stance soon.  “We are on pause now for a while” and “I’m comfortable where rates are,”  Kashkari, a voting member,  told an audience in Mankato, Minn.

Fed’s Kashkari Expects Rates to Remain Steady

The Dow rose in the AM & buyers kept it around that level (above 29.3K) for the rest of the session.  Caution is being thrown to the wind.  The coronavurus scare is becoming a major negative for business around the world.  But the NAZ keeps climbing to 10K & the Dow remains close to its record highs.  However, gold is in heavy demand, primarily by investors with negative thoughts about the future of the stock market.  The Volatility  Index (VIX) keeps sloshing around in the 14s, reflecting a strong desire by investors to buy risky investments (i.e. stocks).  That disconnect can not last.

Dow Jones Industrials

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