September 24, 2018

The major stock market averages sagged at the open (Dow -190 points; SPX -.5%). A number of sectors are down more than 1% in early trading: consumer staples, financials, industrials, real estate and materials. Only energy, tech & telecom sectors are in the green. The VIX Index—a common measure of investor fear—is trading back up to 12.6, which is considered fairly low. Remember, the VIX spiked briefly to 37 during January’s stock market correction. European stock markets closed down about .5% and Asia was mixed in overnight trading. The dollar is a bit weaker against a basket of foreign currencies, and that is giving some life to commodities. WTI crude oil is up over 2% to trade around $72.50/barrel. So we’re nearly back to July highs on oil. Bonds are selling off again as yield tick higher. The 5-year Treasury yield is up around 2.96% and the 10-year yield just ticked up to 3.08%. It looks like the 10-year yield wants to trade back up to May’s multi-year high of 3.11%.

Political and geopolitical issues are weighing on stocks. China turned down an offer from the Trump Administration to re-start trade negotiations. The Wall Street Journal reports China has tabled a plan to send two delegations to Washington, D.C. This is not surprising since President Trump announced additional trade tariffs on $200bil of imported Chinese goods a week ago. Separately, Bloomberg reports that Rod Rosenstein, US deputy attorney general, plans to resign. He is the official in charge of Special Counsel Robert Mueller’s investigation into the Trump Administration’s connection with Russia. The reason: a report that Mr. Rosenstein “suggested to colleagues…that he would secretly record conversations” with Trump. Finally, an NBC-Wall Street Journal poll showed Democrats are likely to take control of Congress in the upcoming mid-term elections.

Bloomberg says oil prices may rise to $100/barrel in the next few months. Traders are eyeing some temporary supply constraints. First, the Trump Administration may re-impose sanctions on Iranian exports (including oil) and this could potentially remove 1.5 million barrels per day from global supply. Second, Venezuela’s oil output is falling due to its economic crisis. Third, while US oil production is rising, there are apparently some key supply bottlenecks keeping the lid on further production gains. And finally, OPEC doesn’t seem willing to increase production. The cartel, of course, loves higher oil prices, but it also knows that the supply constraints listed above are likely temporary.

JP Morgan CEO Jamie Dimon says the real danger of the “trade skirmish” with China is not the economic impact of trade tariffs, but rather its impact on “confidence.” If it escalates, business leaders may defer investment and pull back on growth. But currently, Me. Dimon noted significant economic strength. Households are in good shape, tax reform is a benefit, the financial system is healthy, credit conditions are strong. “We don’t see any economic potholes.”

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