Financial Review

Forget About It

…Stocks stumble into the holiday. Home price climb. Trade war heats up. WTO warns. Fitch warns. US Chamber of Commerce warns. Trump warns NATO allies. China blocks Micron. Facebook coverup. Tesla cuts corners to almost hit target. Oil higher for the holiday. Have a Happy 4th.

Financial Review by Sinclair Noe for 07-03-2018

DOW – 132 = 24,174
SPX – 13 = 2713
NAS – 65 = 7502
RUT + 5 = 1660
10 Y – .03 = 2.83%
OIL + .20 = 74.14
GOLD + 10.80 = 1253.30

 

Stocks started in positive territory but could not hold the gains, even for a holiday shortened session. U.S. financial markets will be closed July 4, in observance of Independence Day. Other global markets will operate on a normal schedule. This week marks the beginning of a new month, new quarter and the start of the second half of the year. U.S. equity markets will enter the second half with paltry gains based on recent history, as the S&P 500 is up less than 2% since the start of the year, and the Dow Industrial Average is in negative territory year-to-date. Returns in the bond market were poor, as Treasury prices fell, sending yields on benchmark long-dated issues up more than 40 basis points since the start of the year; still, not enough to keep the yield curve from flattening; the spread between the 2-year Treasury note and the 10-year note is just 30 basis points. Meanwhile, the dollar strengthened against major rivals, with the Dollar index rising 2.8% year to date.

 

The CoreLogic Home Price Index shows home prices rose both year over year and month over month. Home prices increased nationally by 7.1 percent year over year from May 2017 to May 2018. On a month-over-month basis, prices increased by 1.1 percent in May 2018 – compared with April 2018. In Arizona, home prices increased 7.4% year over year, and jumped 0.9% in May compared to April. The CoreLogic HPI Forecast indicates that home prices will increase by 5.1 percent on a year-over-year basis from May 2018 to May 2019. Inventory is tight and will likely get tighter. Across the U.S., 15 percent of homeowners and 28 percent of renters have indicated a desire to buy a home in the next 12 months, while only 11 percent have indicated a desire to sell.

 

Over 40 World Trade Organization members, including the 28 countries of the European Union – warned that the U.S. action imposing tariffs on imported cars and parts could seriously disrupt the world market and threaten the WTO system, given the importance of cars to world trade. The United States has already imposed tariffs on European steel and aluminum imports and is conducting another national security study that could lead to tariffs on imports of cars and car parts. Both sets of tariffs would be based on concerns about U.S. national security. Trump said on June 29 that the probe would be completed in 3-4 weeks. But the European Union has warned the United States that imposing import tariffs on cars and car parts would harm its own automotive industry and likely lead to counter-measures by its trading partners on $294 billion of U.S. exports.

 

Fitch Ratings warned that rising tensions between the US and its trading partners could lead to new measures with a greater impact on global growth with as much as $2 trillion in global trade in jeopardy if Trump remains on a trade warpath. The US Chamber of Commerce, an advocacy group that represents more than 3 million American businesses, launched a new campaign on Monday designed to persuade policymakers and the public that increasingly aggressive trade policies represent a huge threat to the American economy. The Chamber released an interactive graphic that maps out how Trump’s trade conflicts with China, Europe, Canada, and Mexico could affect each state in the country in the coming months. It details how many of each state’s exports to foreign countries are vulnerable to retaliatory tariffs against Trump’s tariffs — and warns that they could cause millions of job losses.

 

Trump said he is working to bring other motorcycle companies to the United States, following Harley-Davidson’s decision to shift some production for European customers overseas. Harley Davidson said on June 25 it was shifting some production for European-bound motorcycles from U.S. facilities to avoid tariffs being imposed by the European Union to counter U.S. duties imposed by Trump. Trump tweeted that Harley’s June announcement was the reason why Harley had slower sales last year, saying Harley customers were unhappy with the move and that sales had fallen 7 percent in 2017. So maybe that’s because Harley riders can see into the future?

 

And then reports that Trump has sent letters to NATO allies – including Germany, Belgium, Norway and Canada — taking them to task for spending too little on their own defense and warning that the United States is losing patience with what he said was their failure to meet security obligations shared by the alliance.

 

Canadian tariffs took effect Sunday, with those measures serving as a response to U.S. metals tariffs. And some of the first tranche of tariffs, aimed at $50 billion in imports from China and designed to punish Beijing for alleged intellectual-property violations and technology theft, will be implemented July 6, with an expectation that China will respond in kind. China’s customs agency unexpectedly issued trade data that showed growth in exports to the U.S. slowing.

 

Shares of American Airlines, United Continental and Delta Air Lines fell between 1 percent and 2.3 percent after Deutsche Bank downgraded all three stocks saying the growing U.S.-China trade dispute could weigh on their results.

 

Micron Technologies dropped 5.5% to close at $51.48 following a report that a Chinese court had blocked sales in China of memory-chip products from the Boise, Idaho-based company. Other semiconductor stocks also suffered, as the fight between China and Micron is seen as a possible precursor of more trade disputes between China and the US.

 

Sometimes the coverup is worse than the crime. Facebook fell 2 percent, after a report that a federal probe on the data breach linked to Cambridge Analytica had been broadened and would include more government agencies. The Federal Bureau of Investigation, the Securities and Exchange Commission and the Federal Trade Commission have joined the Department of Justice in its inquiries about the two companies and the sharing of personal information of 71 million Americans. The questioning from federal investigators centers on what Facebook knew three years ago and why the company did not reveal it at the time to its users or investors.

 

Tesla said Monday it reached its one-week production goal of 5,000 Model 3 cars for the last week of the June quarter. But the company fell short on its second-quarter deliveries by posting 40,740 vehicles delivered versus the consensus expectation of approximately 51,000. Tesla shares fell 7.2 percent today. The company’s shares hit the lows of the day on a report it decided to skip a “brake-and-roll” testing step in the manufacturing of its Model 3 vehicles. Tesla did eliminate the brake test because it deemed it to be redundant.

 

Barnes & Noble said that it has fired CEO Demos Parneros for violating company policies. The company did not specify exactly which policies were violated. It did say, however, that the termination “is not due to any disagreement with the Company regarding its financial reporting, policies or practices or any potential fraud relating thereto.”

 

Oil prices started the session higher, dipped and then recovered to finish up 20-cents at 74.14. In earlier trade, WTI oil topped $75 a barrel for the first time since November 2014. You’re starting to hear talk of oil shock. American diplomats are pushing oil buyers to cut off all purchases of Iranian crude by the beginning of November. A senior State Department official reaffirmed the tougher-than-anticipated policy on Monday. By the Fourth of July, drivers usually see the highest gas prices of summer in the rear-view mirror. That may not be the case this year, even though the national average is down about 14 cents from the near $3 a gallon drivers paid in late May. Consumers are paying the highest Fourth of July gasoline prices in four years. As of today, the national average price at the pump is $2.86 per gallon – that is a penny higher than Monday’s price and two cents higher than a week ago. In May, gasoline peaked at $2.99 per gallon, according to AAA. US refineries are running at full throttle, taking in last week 18 million barrels of oil to process – so that’s about as good as we can hope for.

 

The Fed will release the minutes of the June FOMC meeting on Thursday. At the June meeting, the Fed raised the target range for its benchmark policy rate to between 1.75% and 2% and made changes to its statement and economic projections that were hawkish relative to expectations. The central bank projected four rate increases in 2018 instead of three previously planned. Economists will be looking closely to see how much pusback there might have been from doves and also for clues to what it could take the Fed to deviate from its current pace of lifting rates each quarter.

 

Global debt from corporations, governments and households now stands at $237 trillion. And the quality of that debt is overall worse than it was in 2008. Meanwhile, central bankers don’t have as much dry powder as in the days before Lehman, and government balance sheets are even more stretched. And politics around the world are far more fractious. And the global order is fraying. You could also add that we seem to be in the middle of an oil-price shock and that the yield curve (the spread between long- and short-term interest rates) has nearly inverted, which is often a recession harbinger. Or you could just ignore all that and have a happy Fourth of July.

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