Financial Review

Could’ve Been Worse

…Dow drops 784 points, but trims losses. Oil slides as OPEC meets. US an oil exporter. Huawei exec arrested in Canada – trade tensions spike. Trade deficit jumps. ADP private payroll 179k in November. ISM services sector increases. Stopgap government funding for 2 weeks.

Financial Review by Sinclair Noe for 12-06-2018

DOW – 79 = 24,947
SPX – 4 = 2695
NAS + 29 = 7188
RUT – 3 = 1477
10 Y – .05 = 2.87%
OIL – 1.13 = 51.76
GOLD + .50 = 1238.20


Stocks pared losses in the final hour or so of trading. The Dow industrials had been down 784 points earlier in the session. Globally, stocks did not bounce. The FTSE 100 index suffered its biggest percentage fall since the day after the EU referendum in June 2016 – closing almost 218 points lower at 6,704. Theresa May’s uphill struggle to get the House of Commons to agree her Brexit deal provided an additional cause of market anxiety in London. The 3.15% fall in the FTSE left the market at its lowest level in two years. Only three of the 100 companies quoted in the FTSE 100 closed up on a day of heavy and coordinated selling on every major global stock market. Reports of a Huawei executive’s arrest  – and China’s demand for her release – led to falls of 2% in the Shanghai and Tokyo markets overnight and the sell-off spread to Europe, where all the main bourses saw losses in their main indices of more than 3%. Frankfurt’s DAX index has now fallen by more than 20% since its peak – the official definition of a bear market – on concerns that the country’s manufacturing exporters will be hard hit by an intensification of US-China protectionism.


Meanwhile, oil prices slid today as oil ministers of OPEC gathered for a meeting in Vienna, Austria to discuss output. Attendees decided to delay a decision on production until after meeting with other producers on Friday. Saudi Energy Minister Khalid al-Fahlih previously signaled that the new round of production cuts may come in less-than-expected at a 1 million barrel per day reduction, versus the 1.2 million to 1.4 million barrel per day cut that markets had factored in.


Maybe the US should send a delegate to the OPEC meeting. When adding in all imports and exports of crude and refined products, the US exported a net 211,000 barrels per day for the week through Nov. 30 – the first time that has happened, according to US Energy Department figures dating to 1973. That was on the back of a jump in crude exports to a weekly record of more than 3.2 million bpd. Petroleum exports until recently were dominated by products like gasoline and diesel, but that has changed since the US shale revolution that has sped up drilling and extraction of oil, helping boost overall US production to a record 11.7 million bpd. The US Energy Information Administration  reported earlier today that crude inventories fell 7.3 million barrels last week, the first drawdown since September, as net crude imports hit a record low of 4 million bpd.


Meng Wanzhou, the CFO for Huawei Technologies and daughter of the founder of the Chinese telecommunications giant, was arrested in Vancouver, Canada on December 1 and could face extradition to the US over potential violations of US sanctions on Iran. The arrest, which took place the same day that Trump and Chinese President Xi Jinping met at the G20 summit in Buenos Aires to discuss trade policy, could have far-reaching implications for the future of US-China relations, as well as for multinational suppliers to Huawei. The Chinese embassy in Canada condemned Meng’s arrest as a “serious violation of human rights, saying that Meng did not violate any US or Canadian laws.


The fallout from the arrest complicates the already-tense relationship between the US and China just days after Trump and Xi agreed to a 90-day hold on additional tariffs. Technology has long been the focus of bilateral economic friction, with the US government already having proposed export controls on “emerging technologies.” The arrest is a warning to other nations about violating US sanctions, but it complicates the trade talks with China.


Tools, techniques, and procedures that have previously been used in attacks by Chinese hackers were discovered by investigators looking into the breach of up to 500 million customers in Marriott’s Starwood reservation system, revealed earlier this week.


The US trade deficit jumped to a 10-year high in October as soybean exports dropped further and imports of consumer goods rose to a record high, suggesting the tariff-related measures to shrink the trade gap likely have been ineffective. The Commerce Department said the trade deficit increased 1.7 percent to $55.5 billion, the highest level since October 2008. The trade gap has now widened for five straight months. Trade subtracted 1.91 percentage points from GDP growth in the July-September quarter. Growth estimates for the fourth quarter are around a 2.8 percent annualized rate. The economy grew at a 3.5 percent pace in the third quarter. In October, exports of goods and services slipped 0.1 percent to $211.0 billion. Soybean exports, which have been targeted by China in the trade dispute and have been dropping for the last several months, fell $0.8 billion. Exports of civilian aircraft and engines also fell. In October, exports of goods and services slipped 0.1 percent to $211.0 billion. Soybean exports, which have been targeted by China in the trade dispute and have been dropping for the last several months, fell $0.8 billion. Exports of civilian aircraft and engines also fell. Imports of goods and services rose 0.2 percent to $266.5 billion, an all-time high. Consumer goods imports increased by $2.0 billion to a record high of $57.4 billion, boosted by a $1.5 billion jump in imports of pharmaceutical preparations. Motor vehicle imports were the highest on record in October, as were imports of other goods.


Separately, the ADP National Employment Report showed private payrolls rose by 179,000 jobs in November after a downwardly revised increase of 225,000 in October. The ADP report, which is jointly developed with Moody’s Analytics, was published ahead of the government’s more comprehensive employment report for November, which is scheduled for release tomorrow morning. Estimates call for about 190,000 to 200,000 new jobs in November.


The Labor Department said initial claims for state unemployment benefits dropped 4,000 to a seasonally adjusted 231,000 for the week ended Dec. 1. Jobless claims are a less-than-reliable gauge of the labor market, in part because so many people are not eligible for unemployment benefits.


The Institute for Supply Management (ISM) said its non-manufacturing activity index rose 0.4 point to a reading of 60.7 last month. A reading above 50 indicates expansion in the sector, which accounts for more than two-thirds of US economic activity. But the ISM’s employment measure fell 1.3 points last month, with employers in the construction industry reporting difficulties finding workers “due to lack of qualified talent.”


The stock market is getting hammered, interest rates have gone south in a hurry, and many at the Federal Reserve are sounding more dovish. But the Fed is still likely to raise interest rates again in December. The FOMC “made clear” in the minutes of the November meeting that they intend to raise interest rates in December and nothing in yesterday’s Fed Beige Book would indicate a break in rate hikes. There is some time left for Fed officials to guide markets away from December hike, but not much. Officials will stop talking publicly Friday night ahead of their two-day meeting that ends Dec. 19. Instead, look for Fed officials to possibly signal a new wait-and-see mentality after they hike rates at their meeting in December.


Mostly due to a rising stock market, the net worth of households rose in the third quarter. The net worth of households and nonprofits improved to a record high in the third quarter of $109.04 trillion from $106.97 trillion, a gain of 1.9%


Congress approved a two-week stopgap spending bill to avert a government shutdown. The stopgap bill extends funding through Dec. 21. Without action by Congress, funding for several federal agencies, including the Department of Agriculture, State Department and Department of Homeland Security, had been set to expire this week. Before the stopgap bill expires, the Republican-led Congress is expected to consider a $450 billion bill to fund the departments through the fiscal year that ends next Sept. 30.


While lawmakers on both sides of the aisle have already said they’re not particularly interested in a partial government shutdown over the spending bills, Trump has threatened to veto DHS funding that doesn’t meet a $5 billion demand he’s made for a border wall. As things stand, a House version of the legislation provides $5 billion in funding for border security, including physical fencing, while a Senate version includes $1.6 billion for such efforts. It’s worth noting that although this money isn’t dedicated to constructing a “wall,” it would be used to establish physical barriers along the border. Trump has demanded $5 billion this year as part of his plan to build a wall on the border with Mexico, but Mexico has been slow to write a check.


The US Senate voted to confirm Kathy Kraninger as the next head of the Consumer Financial Protection Bureau (CFPB), the federal government’s top consumer watchdog. If you haven’t heard of her, don’t worry — before she was tapped to head the agency, neither had pretty much anyone else. Kraninger, who was confirmed by a 50-49 vote, served as associate director for general government programs at the Office of Management and Budget (OMB), overseeing a $250 billion budget across seven Cabinet departments, including the Department of Homeland Security and the Department of Justice; but notably Kraninger does not have background in consumer related areas.  She will take permanent charge over the CFPB and replace Mick Mulvaney, who became interim director of the bureau after Richard Cordray, its first director, stepped down in November 2017.

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