…..Why flights were canceled in PHX. Oil in bear market. Fed heads dovish, more or less. Account deficit grows. Ford to China. China to EEM. Tesla not at fault. Russia-Iran sanctions glitch. Barclays behaving badly.
Financial Review by Sinclair Noe for 06-20-2017
DOW – 61 = 21,467
SPX – 16 = 2437
NAS – 50 = 6188
RUT – 15 = 1402
10 Y – .04 = 2.15%
OIL – .97 = 43.23
GOLD – 1.00 = 1243.60
Tomorrow is the first day of summer. And it is too hot. The National Oceanic Atmospheric Administration reported Monday that the average global temperature in May 2017 was 1.49 degrees above the 20th-century May average of 58.6 degrees. This May was the third-hottest on record since the organization began collecting data in 1880. Phoenix has hit 120 only three times in recorded history — the last time 22 years ago. The record high was 122 degrees on June 26, 1990. We hit reached 118 on Monday, which the National Weather Service says is rare. In fact, temperatures at that mark or higher have only been recorded 15 times since record-keeping started in 1896.
Dozens of flights at Arizona’s Phoenix Sky Harbor airport were delayed or canceled on Monday and Tuesday, and airlines are limiting the number of seats sold, to prevent the planes from exceeding maximum weight for safe takeoff in the hot conditions. Most of the smaller, commuter planes have a maximum operating temperature of 118 degrees. Larger planes made by Boeing and Airbus have maximum operating temperatures of 126 and 127 degrees, respectively. The real problem with flying in hot temperatures is similar to the problem faced in high altitudes: thin air. Hotter air is less dense, which means there is less air beneath the wings for lifting the aircraft and less air to flow through the jet engines. To compensate, airlines can keep the weight down, increase thrust, and make sure they takeoff on long runways.
Be careful out there. The main burn center in Phoenix has issued a warning to people to be careful around car interiors and pavement. PetSmart is offering free booties so your pets don’t burn their paws on concrete and pavement. Stay hydrated and pray your AC doesn’t croak.
Oil prices hit a 7-month low. OPEC and non-OPEC producers have agreed to cut production by 1.8 million barrels per day and it appears they are complying with the deal to cut global output, but still prices are down as other countries – not part of the agreement – are pumping more. Both Libya and Nigeria have increased output. And US shale drillers that are staging the longest drilling ramp-up on record. Meanwhile traders are hoarding an increasing amount of oil in tankers. In the last month alone, explorers drilled 125 more wells in the Permian Basin than they would open, meaning production is poised to surge further when they turn the spigots on. Hedge fund managers have become very bearish about the outlook for oil prices as production from countries outside OPEC grows and threatens to undermine the effectiveness of OPEC’s output controls.
Shares of oil companies were among the worst performers. The Energy Select Sector SPDR ETF XLE, -1.28%, posting its worst one-day drop since March. West Texas Intermediate crude, the U.S. benchmark closed at $43.23 today, that’s down from a high of $54.45 on Feb. 23, or a 20% decline, which is the common definition of a bear market.
In a speech in Amsterdam to a conference co-sponsored by the central banks of Sweden and the Netherlands, Boston Fed President Eric Rosengren said lower rates may be a more permanent feature on the economic landscape because they reflect broad population trends. Separately, Chicago Fed President Charles Evans said late Monday the central bank could be done raising rates this year. He reiterated those comments this morning on CNBC and with The Wall Street Journal. He said he supports the current policy of “very gradual” interest-rate hikes and a slow reduction of the balance sheet. Evans said it was important that financial markets realize that inflation can exceed the Fed’s 2% target from time-to-time. Earlier on Monday, New York Fed President William Dudley struck a hawkish tone, arguing against slowing the pace of interest-rate increases.
Federal Reserve Vice Chairman Stanley Fischer said that he was worried memories might be fading about the pivotal role housing played in the financial crisis. Fischer said, “House prices are now high and rising in several countries, perhaps as a result of extended period of low interest rates.” Fischer noted that U.S. government’s role in housing is increasing with Fannie Mae , Freddie Mac and the Federal Housing Administration “now the dominant providers of mortgage financing.” The Fed’s #2 said “there is more to be done” to strengthen the resilience of the housing finance systems. Just taking the possibility of severe stress seriously would help, he said. And government support for housing should always be made explicit.
The U.S. current-account deficit, a measure of the nation’s debt to other countries, rose 2.5% to $116.8 billion in the first quarter. The increase in the current-account deficit in the fourth quarter was tied to a higher trade deficit in goods such as foreign autos or cellphones and a smaller surplus in primary income — returns on American-owned assets held abroad. The fourth-quarter gap in the current account was raised to $114 billion. The current-account deficit was 2.5% of GDP in the first quarter, up slightly from 2.4% at the end of 2016. The gap is well below a peak of 6.3% in 2005.
Ford Motor will move some production of its Focus small car to China and import the vehicles to the United States. Ford painted the production shift from Mexico to China, slated in mid-2019, as a purely financial move that will save the company $500 million in reduced tooling costs. The decision also signals a shift in strategy at Ford, which is responding to dwindling U.S. consumer demand for small cars in favor of more expensive and more profitable trucks and SUVs. Ford said it would invest $900 million at the Kentucky truck plant to build the redesigned Navigator and Ford Expedition. It has contingency plans to build more of the big SUVs at an Ohio plant if demand grows. The current Focus will be phased out of production in Wayne, Michigan in mid-2018, according to Hinrichs. The Wayne plant will begin building a new Ranger midsize truck in late 2018 and a Bronco midsize SUV in 2020.
MSCI said it plans to add mainland Chinese shares to its benchmark emerging markets index. MSCI will add 222 China A Large Cap stocks on a gradual basis beginning next year. The addition of the mainland Chinese shares could be a big boost to the world’s second-largest stock market, which has until now drawn limited foreign investor interest because of high volatility, frequent trading halts and limited foreign investor access to the Shanghai and Shenzhen stock markets. The iShares MSCI Emerging Markets ETF (EEM) rose 0.15 percent in after-hours trade. The MSCI Emerging Markets Index is tracked by an estimated $1.6 trillion in assets, as of the end of June last year.
A man killed in a crash last year while using the semi-autonomous driving system on his Tesla Model S sedan kept his hands off the wheel for extended periods of time despite repeated automated warnings not to do so. The National Transportation Safety Board (NTSB) released 500 pages of findings into the May 2016 fatal crash. The incident raised questions about the safety of systems that can perform driving tasks for long stretches with little or no human intervention, but which cannot completely replace human drivers.
Legislation to impose new sanctions on Russia and Iran that passed the U.S. Senate nearly unanimously last week has run into a procedural problem that could prevent a quick vote in the House of Representatives. The Countering Iran’s Destabilizing Activities Act, which also includes new sanctions against Russia, passed the Senate 98-2 last week. But the measure must still pass the House before it can be sent to Trump to sign into law, or veto, and the House parliamentarian found that the legislation violated a constitutional requirement that any bill that raises revenue for the government must originate in the House, something known as a “blue slip” violation. The Russian ruble just had its worst back-to-back days since February 2016, falling 5.68 percent, as the drop in oil and broadened US sanctions took a toll. Russian stocks entered a bear market last week after the U.S. Senate voted overwhelmingly to expand penalties against Russia.
Barclays and four former executives were charged with conspiracy to commit fraud during the bank’s 2008 capital raising from Qatar as it sought to avoid a bailout. The four men are the most senior British banking executives charged since the financial crisis and include former Chief Executive Officer John Varley, former chairman of investment banking for the Middle East Roger Jenkins, ex-wealth chief Thomas Kalaris, and Richard Boath, the former European head of the bank’s financial institutions group. The details are still a bit sketchy but it looks like Barclays gave Qatar a loan and then Qatar made what was presented as an equity investment to regulators. Qatar got a fee for going along with the ruse and Barclays avoided a bailout.
After the closing bell, FedEx reported a higher-than-expected quarterly profit, as the package delivery company benefited from its TNT Express acquisition and higher sales across its express, ground and freight business units. FedEx said profit will climb as much as 14 percent in the current fiscal year as the courier benefits from a recent jump in prices and package deliveries. The outlook underscored the potential payoff from FedEx’s heavy investments in fiscal 2017 to handle more of the surge in e-commerce deliveries. The air-freight pioneer, an economic bellwether because of the variety of shipments it carries, is also poised to gain from a stronger worldwide economy.