Markets drop after Trump eliminates special treatment for Hong Kong

Dow was off only 17 after being down 300 earlier in the session, declines ahead of advancers about 5-4 & NAZ jumped 120.  The MLP index was flattish in the 144s & the REIT index lost 2+ to 341.  Junk bond funds continued mixed & Treasuries were in demand.  Oil gained 1+ to the high 34s (more below) & gold went ujp 17 to 1745 (near recent multi year highs).

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Federal Chair Chairman Jerome Powell said the central bank's crisis-lending program for small-&  medium-sized businesses will begin issuing emergency loans within a few days.  Businesses with up to 15K & $5B in revenue can apply for financing thru the $600B Main Street Lending Program.  "We're days away from making our first loans in Main Street," Powell said during a virtual conference.  Under the program, businesses can secure loans of up to 4 years from banks at low rates.  Payments can be deferred in their first year, although the loans must eventually be repaid.  The program is designed to help businesses that are too big to tap the gov-backed Paycheck Protection Program, but too small to access other avenues of relief offered by the central bank.  Companies that were on sound financial footing pre-crisis & only damaged by the virus outbreak can tap the program.  The $2.2. CARES Act signed into law at the end of Mar provided $454B for the Treasury to backstop the various lending programs offered by the Fed.  "It is very challenging," Powell said, "because it's an extraordinarily diverse space. The credit needs of different kinds of companies in different kinds of industries are extraordinarily diverse."  There is a $500K minimum, though Powell said he could see the Fed "expanding it on either end."

Powell: Fed is 'days away' from making first loans through Main Street lending facility

The Chicago Business Barometer fell this month & hit its lowest point in nearly 40 years, MNI Indicators said.  The monthly reading was 32.3, the forecast called for it to be 40.  MNI Indicators said the reading was the barometer's lowest since 1982 & that the supplier deliveries & order backlogs indicators -- 2 of the main 5 that go into the barometer reading -- fell the most.  The latter fell to its lowest level since 2009.  The employment indicator rose, but new orders fell to its lowest point since 1980.  The 5 sub indicators that go into producing the barometer are employment, order backlogs, new orders, production & supplier deliveries.  About 27% of businesses asked said they expected Covid-19 to affect business plans for between ½ a year to 9 months.  About 23% expected it to affect plans for 9 months to one year & 19% said they expected it to affect plans for more than that.  Meanwhile, around 10% expected the effects to last for under three months & 21% expected the effects to last between 3-6 months.

Chicago business barometer falls to lowest level since 1982

Pres Trump announced he would begin taking steps to revoke Hong Kong's favored trade status with the US, in response to a controversial new security law that would effectively bar political protest in Hong Kong.  “I am directing my administration to begin the process of eliminating policy exemptions that give Hong Kong different and special treatment,” Trump said.  “My announcement today will affect the full range of agreements that we have with Hong Kong, from our extradition treaty, to our export controls and technologies,” Trump added.  “We will take action to revoke Hong Kong’s preferential treatment as a separate customs and travel territory from the rest of China.”  The shift in Hong Kong's status immediately jeopardizes several aspects of the former British colony's relationship with the US, which has so far meant that Hong Kong has been spared punishing tariffs that are a hallmark of Trump's trade war with Beijing.  Trump also announced that the US would be terminating its relationship with the World Health Organization, a move likely to draw criticism from public health experts & US allies.  Trump said the organization had failed to make “the requested and greatly needed reforms,” & he blamed the global health group for a lack of “transparency.”  For weeks, the Trump administration has been ratcheting up pressure on Beijing over its alleged cover-up of early coronavirus cases.  Trump has publicly blamed China for the virus itself & for its outsized severity in the US.  Beijing, in turn, has suggested the virus originated in US service members, a claim widely rejected by intl health experts.  In the past week, however, the pressure from the US has taken a more serious turn in response to a proposed Chinese security law that threatens the long-standing independence of Hong Kong.  The law, formally approved yesterday by China's People's Congress, is expected to criminalize most forms of political protest under blanket bans on “sedition” & “subversion.”

Trump taking action to eliminate special treatment for Hong Kong

Oil futures reversed early losses to trade with strong gains, waving off data that showed an unexpected rise in US crude inventories as traders focused on a fall in gasoline stocks & a further decline in crude stored at the delivery hub in Cushing, Oklahoma.  West Texas Intermediate crude for Jul rose 90¢ (2.7%) to finish at $33.71 a barrel, while Aug Brent crude gained 55¢ per barrel (1.6%) to finish at $35.29.  The Energy Information Administration (EIA) said inventories rose 7.9M  barrels last week.  Oil had been under pressure after the American Petroleum Institute late Wed reported that crude inventories rose 8.7M barrels last week.  The forecast called for the more closely followed EIA report to show crude inventories fell by 1.2M barrels.  The rise in inventories reflected a surge in imports of oil from Saudi Arabia as a much publicized flotilla of tankers carrying crude from the kingdom begin to arrive, a legacy of the short-lived price war between the Saudis & Russia that amplified a collapse in crude prices in Mar & Apr.

Oil turns higher, waving off unexpected rise in crude inventories

Economic data remains grim but they are lagging indicators.  The economy is rebounding, although off depression lows.  Trump's comments about China were not has harsh as expected, bringing back buyers in the last 2 hours of trading.  The Dow finished the month up 1K & 7K above the Mar lows, making for a very impressive rally.

Dow Jones Industrials

Markets drop as consumer spending in April sinks by a record 13.6%

Dow sank 168, decliners over advancers 2-1 & NAZ eased back only 3.  The MLP index fell 4 to 140 & the REIT index fell 4 to the 339s.  Junk bond funds just fluctuated & Treasuries were in demand.  Oil was flattish in the 33s (concluding its best month in history) & gold rose 19 to 1748.

AMJ (Alerian MLP Index tracking fund)

CL=F

Crude Oil

33.16

-0.55

-1.6%

GC=F

Gold

1,742.70

+14.40

+0.8%

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US consumer spending plunged by a record-shattering 13.6% in Apr as the viral pandemic shuttered businesses, forced Ms of layoffs & sent the economy into a deep recession.  Last month's spending decline was far worse than the revised 6.9% drop in Mar, which itself had set a record for the steepest one-month fall in records dating to 1959.  Commerce Dept figures reinforced evidence that the economy is gripped by the worst downturn in decades, with consumers unable or too anxious to spend much.  Even with employers cutting millions of jobs during the month, personal incomes soared 10.5% in Apr, reflecting Bs of $s in support thru gov payments in the form of unemployment benefits & stimulus checks.  The depth of the spending drop is particularly damaging because consumer spending is the primary driver of the economy, accounting for about 70% of economic activity.  Last month’s figure signaled that Q2 will be especially grim, with the economy thought to be shrinking at an annual rate near 40%.  That would be, by far, the worst quarterly contraction on record.  The report showed sharp declines in consumer spending across the board — from durable goods like cars to non-durable items such as clothing & services ranging from doctor visits to haircuts.  In Apr, the nation's jobless rate was 14.7%, the highest since the depression, & many economists think it will top 20% for May.  States are gradually restarting their economies by letting some businesses reopen with certain restrictions & some laid-off employees are being recalled to work.  Still, the job market remains severely depressed & the outlook for the rest of the year remains bleak.  Some financial support for the tens of Ms of consumers who have been laid off over the past 2 months is coming from weekly unemployment benefits.  Besides whatever unemployment aid states are providing to laid-off workers, the federal gov is providing $600 a week in additional benefits.

Consumer spending sinks by record 13.6%

Pres Trump said he would hold a news conference “on China,” but he offered no details as to what he would say.  Even without any details, his announcement yesterday was enough to send markets tumbling.  White House declined to comment on the content of the presidential announcement, & advisers said they didn't want to get ahead of the pres by discussing it in advance.  Even Trump was cryptic about the expected news, tweeting one word, “CHINA!” today.  For weeks, the administration has been ratcheting up pressure on Beijing over its alleged cover-up of early coronavirus cases.  Trump has publicly blamed China for the virus itself & for its outsized severity in the US.  Beijing, in turn, has suggested the virus originated in US service members, a claim widely rejected by intl health experts.  In the past week, however, the pressure from the US has taken a more serious turn in response to a proposed Chinese security law that threatens the long-standing independence of Hong Kong.  The law, formally approved yesterday by China's People's Congress, is expected to criminalize most forms of political protest under blanket bans on “sedition” & “subversion.”  Wed, Secretary of State Mike Pompeo delivered a report to Congress declaring that Hong Kong was no longer autonomous from China.  “No reasonable person can assert today that Hong Kong maintains a high degree of autonomy from China, given facts on the ground,” Pompeo said.  The shift in Hong Kong's status immediately jeopardizes the former British colony's favorable trade relationship with the US, which has so far meant that Hong Kong has been spared punishing tariffs that are a hallmark of Trump's trade war with Beijing.  The State Dept was required to issue a determination on Hong Kong’s autonomy under pro-democracy legislation passed by Congress late last year.  The law also requires Trump to impose sanctions on foreigners who undermine “fundamental freedoms and autonomy in Hong Kong.”  For investors, a revocation of Hong Kong’s favored status is a worst-case outcome of Fri's news conference.  But it’s far from guaranteed.

Trump’s China press conference could mark the end of his cautious approach to Beijing

The coronavirus crisis has Americans hoarding more money than ever as widespread fear paralyzes consumer spending habits.  The personal savings rate hit a historic 33% in Apr, the Bureau of Economic Analysis said.  This rate — how much people save as a percentage of their disposable income — is by far the highest since the department started tracking in the 1960s.  Apr's mark is up from 12.7% in Mar.  The swiftness & severity of a US economic recovery hinges on whether consumers continue to stockpile cash or start to spend again.  The previous record savings rate was 17.3% in 1975.  The savings rate was elevated above 13% throughout most of the early 1970s.  The increase in savings came as spending declined by a record 13.6% in Apr.  US consumers have amassed savings as the deadly coronavirus causes unprecedented economic & societal disruption.   The deadly virus — which forced a gov mandated shutdown of the economy — has caused more than 40M Americans to file for unemployment since the virus was declared a pandemic.  With the US consumer accounting for more 2/3 of the economy, the speed & robustness of economic recovery depends on whether the increase in savings is a result of the shutdown or reflects a more structural change in consumer habits.  Saving during the Covid-19 pandemic is especially unique due to the shutdowns.  Hundreds of thousands of small & large businesses shuttered

U.S. savings rate hits record 33% as coronavirus causes Americans to stockpile cash, curb spending

While the consumer spending data was grim, it represents the past.  May is expected to show some economic improvement indicating the recovery is beginning.  Trump's comments on China & US-China relations will move markets later & traders are already betting they will be negative.

Dow Jones Industrials

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Markets retreat on concerns about US-China trade relations

Dow dropped 147 (session low) after being in the black all day, decliners ahead of advancers 3-2 & NAZ fell 43.  The MLP index fell 2+ to the 143s & the REIT index crawled up 1+ to the 343s.  Junk bond funds fluctuated & Treasuries dropped in price.  Oil went up to the 33s & gold added 3 to 1729 (more on both below).

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China's legislature approved a resolution to impose national-security laws on Hong Kong, overriding the territory's partial autonomy in a bid to crush anti-Beijing protests that have challenged Chinese leader Xi Jinping.  The vote, the end of a weeklong session of Beijing's rubber-stamp legislature, the National People's Congress, approved a decision to “establish and enhance the legal framework and enforcement mechanisms for national security” in Hong Kong, state broadcaster China Central Television said.  2878 lawmakers voted for the motion, with only one dissent. 6 voted to abstain, & one didn't cast a vote.  Chinese officials have said the resolution is necessary for safeguarding national security, saying unrest in Hong Kong that started last summer has severely threatened China's sovereignty.  They said Beijing had no choice but to step in to close legislative & enforcement gaps in Hong Kong after the city failed to enact its own legislation against separatist & subversive activities.  Opposition politicians & rights activists in Hong Kong have decried the resolution as a move to undercut the territory's system of self-governance, known as the “one country, two systems” framework, under which Beijing had pledged to keep Hong Kong's “capitalist system and way of life” unchanged for 50 years after Britain returned the city to Chinese rule in 1997.  The US & other countries have voiced concern over the move as well.  Yesterday, the State Dept said it no longer regarded Hong Kong as enjoying a high degree of autonomy from mainland China.  That declaration paves the way for US measures including ending trade privileges for Hong Kong & imposing sanctions on individuals seen as suppressing civil liberties in the territory.  The resolution approved today authorizes senior lawmakers in Beijing to write legislation to prevent & punish separatist, subversive & terrorist activities in Hong Kong, as well as foreign interference in the city's affairs, according to the official Xinhua News Agency.  The laws would then be promulgated by the city's leader.  The resolution also allows mainland Chinese state-security agencies to operate officially in Hong Kong.  The Basic Law, Hong Kong's mini-constitution, requires the city to enact its own legislation against secessionist, subversive & other activities that threaten state security.  Hong Kong authorities attempted to do so in 2003 but abandoned the effort after ½ a M people took to the streets in protest.  Local officials haven't put forward any similar bills since.  The resolution approved allows Beijing to bypass Hong Kong's Legislative Council by tapping a provision in the Basic Law that allows China's legislature to apply national laws to Hong Kong through promulgation by the city's leader in matters of national unity or security.

China parliament OKs controversial Hong Kong law in bid to crush protests

Apr had a record collapse in Americans signing contracts to buy homes, a reflection of the broader shutdown of economic activity in response to the coronavirus outbreak.  The National Association of Realtors said that its pending home sales index plunged 21.8% from the prior month to a level of 69, the largest decline registered in data going back to 2001.  Pending home sales have fallen 33.8% from a year ago.  The index is a barometer of sales over the next 2 months when the transactions are completed.  There are signs that home sales have reached a trough & could rebound.  Low mortgage rates have supported buyer demand, such that the gov's report of new-home sales showed a slight increase in purchases last month.

Pending home sales plunged 21.8% in April on monthly basis

National Economic Council Director Larry Kudlow said that there are encouraging economic signs in states that have reopened businesses & that the Trump administration expects a strong rebound.  “We’re seeing the economy gradually, in phases, reopen in May and June. These are the transition months. We’re actually seeing some glimmers of hope amidst all the hardship and heartbreak,” Kudlow said.  Earlier, the Labor Dept reported that there were more than 2M initial jobless claims last week, bringing the total number of new claims since the coronavirus crisis began to more than 40M.  Continuing jobless claims did decline slightly, however.  Throughout the month of May, states & cities have been lifting economic restrictions that had been used to slow the spread of the virus.  Many states have now allowed non-essential businesses to reopen with social-distancing measures.  Kudlow pointed to the high percentage of unemployed workers in Apr who described their layoff as “temporary” as a reason to expect the economy to recover quickly.  “If that is true, or if that is nearly true, then we may see folks coming back to work faster than we might have thought, let’s say, a month or six weeks ago,” Kudlow added.  He also stressed that the health situation was part of the economic recovery, saying the reopening of states & businesses “has got to be done safely.”  In response to the economic hit from the pandemic, federal leaders passed the CARES Act, which added an additional $600 per week to workers who filed for unemployment & provided support for businesses.  The flat $600 addition to unemployment benefits has been criticized by some politicians because it effectively gives some low-wage workers a raise for not working.  Rep Sen Rob Portman has proposed giving cash bonuses to encourage employees to return to work & Kudlow said the Trump administration was open to that idea.  “It’s something we’re looking at very closely. We may go with something like that,” Kudlow said.

Kudlow says there are encouraging signs from reopening states, sees very strong economic rebound

Burgeoning levels of gov debt are not posing a broader threat & have been necessary to battle the coronavirus pandemic, New York Fed Pres John Williams said.  Even with the federal IOU at $25.6T & counting, the central bank official said there's still plenty of room to spend more.  “I don’t think we’re anywhere near the limit to that,” Williams said.   “The U.S. government is issuing a lot of debt right now, and global investors are gobbling it up.”  Total gov debt has jumped $2.2T since just before the crisis began, an increase of 9.4%, thanks in good part to the CARES Act that provides more than $2T in rescue funds for an economy that could contract more than 40% in Q2.  Congress has been debating additional stimulus that could run to $3T as states begin a tentative reopening of their shuttered economies.  The US already had been on its way to a budget deficit in excess of $1T that now likely will be closer to $3T, according to recent Congressional Budget Office estimates.  All of that has resulted in $310B in interest payments in fiscal 2020, a total held in relative check by record-low interest rates for gov debt as the Fed has sent its benchmark borrowing rate to near zero.  While central bank officials have expressed a commitment to keep rates low for an extended period of time, Williams said he doesn't see the need for negative rates.  He added that he does not see the Ts in lending & liquidity programs that the Fed has initiated will lead to troublesome inflation.  “I don’t see any problems right now in terms of deficits,” Williams added.  “Obviously, in the long run we have to make sure that the fiscal policy in the federal government is on a sustainable path.”  He said that he's more concerned now with making sure money gets to the right places, particularly the state & local govs that had to lay off workers during the financial crisis.

Fed’s Williams says U.S. is not ‘anywhere near’ its limits to run up debt

Abercrombie & Fitch (ANF) sales tanked 34% during Q1 because of store closings during the coronavirus pandemic & people purchasing less apparel as they holed up at home.  Net sales dropped to $485M from $734M a year earlier.  Sales at its namesake Abercrombie brand were down 30% while Hollister sales were down 36%.  Its net loss per share for the period widened to $3.90, from 29¢ a share, a year earlier.  Excluding one-time charges, the loss was $3.29 per share.  The retailer is not offering a Q2 or full-year outlook.  The forecast was for an adjusted loss of $1.39 per share on revenue of $497M.  However, it is difficult to compare reported earnings to  estimates for Q1, as the coronavirus pandemic continues to hit global economies with earnings impacts that are difficult to assess.  CEO Fran Horowitz said that currently roughly ½ of its global store base (409 shops) are back open for business.  She said Q1 digital sales globally were up about 25% year over year & that they have accelerated further into May.  As stores reopen during the Covid-19 crisis, productivity is returning to about 80% in the US & 60% in the Europe, Middle East & Africa region.  In the US, “we are encouraged by recent results, with a customer returning to stores at an even quicker pace than in China,” she said.  The company ended the qtr with $704M in cash & equivalents on hand & had inventories of $427M, down 1% from a year earlier.  The stock fell 1.46 (11%).
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Abercrombie & Fitch sales fall 34%, with stores forced shut due to the pandemic; shares fall

Gold futures finished slightly higher as China-US tensions remained in focus, driving haven buying in stocks.  Elevated animosities between Beijing & the US over China's human rights policies, including its relationship with Hong Kong & the treatment of a Muslim minority, have underpinned buying in safe-haven assets.  China hardened its stance, forging ahead with a resolution to impose national-security laws on Hong Kong in a bid to suppress protests there.  That action comes after the House of Representatives yesterday passed a bill that would sanction Chinese officials involved in the suppression of Uighurs.  The proposal follows the State Dept's determination that Hong Kong no longer was autonomous from China, opening the way for Pres Trump to take a range of steps including revoking special arrangements on trade.  Investors also pointed to further talk about US monetary policy, including negative interest rates & increased appetite for gold-focused exchange-traded funds as part of the driver for gains for gold despite a climb for global stocks.  Aug gold, which is now the most-active contract, ended $1 higher at $1728 an ounce, well off its intraday high at $1743.  A string of US economic reports that highlight the toll of the COVID-19 pandemic did little to sway gold momentum on the session.

Gold prices eke out a gain as China-U.S. tensions support haven buying

Oil futures reversed early losses to end strongly higher, with traders looking past a sharp rise in overall crude inventories to focus on a further decline in stocks at the futures delivery hub in Cushing, Oklahoma, & a drop in gasoline inventories.  West Texas Intermediate crude for Jul rose 90¢ (2.7%) to finish at $33.71 a barrel.  The Energy Information Administration reported a rise in crude inventories of 7.9M barrels last week, but supplies at Cushing dropped by 3.4M barrels.  Gasoline inventories, meanwhile, declined by 700K barrels.

Oil ends with strong gains as traders focus on fall in gasoline inventories, Cushing stocks

There was selling in the closing hour when markets digested a report that Pres Trump was set to hold a news conference on China tomorrow.  Word of an event comes as tensions between China & the US have ratcheted higher, particularly as Beijing was seen threatening the autonomy of Hong Kong.  Previsouly investors took negative reports on the economy with a sense of calm.  They were more interested in prospects for opening the US economy.

Dow Jones Industrials