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Stocks Move Higher As Fed Defends Gradual Rate Hikes

Fed

Monday, August 27, 2018

Stocks rise on Fed outlook. Fed Chair Jerome Powell defended his policy of gradual rate tightening on Friday in Jackson Hole, noting that the economy is strong. Still, other central bankers saw plenty of risks even as the U.S. economy posted a blistering growth rate in the second quarter. “It’s paradoxical that the United States is starting to put obstacles in the road at a time when its economy is firing on all cylinders,” said Agustín Carstens, general manager of the Bank for International Settlements, according to the Wall Street Journal. The markets moved up on Monday on the positive economic outlook from the Fed, although other risks in Turkey and Italy have kept investors on edge.

Chart Of The Week

(Click to enlarge)

- The U.S. dollar has weakened 1.5 percent since the middle of August, easing some pressure on global currencies, while also stopping the decline in commodity prices.

- The strength of the dollar has been a problem for emerging market economies this year, and many market analysts see the recent dip as positive. “The markets want a weaker dollar," Rick Rieder, BlackRock's chief investment officer of global fixed income, told CNN last week. If the dollar continues to gain strength, it would be "the biggest risk to the financial markets today, and arguably one of the biggest risks to the economy."

- The decline over the past two weeks has been welcomed by many, and stocks moved higher at the start of this week.

Markets

Fed to stay the course. Fed Chair Jerome Powell reassured the markets on Friday, stating that the central bank would continue on its course of “further, gradual” rate tightening, noting that the economy remains strong. The comments were his first after public criticism from President Trump, who complained about the tight monetary environment. The markets opened up higher on Monday, and analysts say investors were encouraged by the Fed’s comments and guidance.

Iran ousts economy minister. Iran’s economy minister was tossed out by parliament on Sunday amid economic turmoil in the country. The country’s currency, the rial, has fallen sharply this year, with U.S. sanctions compounding the problem. The move comes after recent shakeup in other key personnel, including the head of the central bank. Protests have been common around the country this year, and the poor economic outlook shows no sign of abating.  Related: Are U.S. Bonds The Next Big Investment Trend?

German business outlook improves. German business morale improved in August for the first time in 2018. The Ifo economic institute said its business climate index rose sharply from July levels, and it comes on the heels of the truce between U.S. President Donald Trump and European Commission President Jean-Claude Juncker in July, which helped dial back the trade war. “The German economy is performing robustly. Current figures point to economic growth of 0.5 percent in the third quarter,” Ifo chief Clemens Fuest said, according to Reuters.

Commodities

Collapse of commodity trading giant burns investors. The collapse of Noble Group (SGX: CGP), the Singapore-based commodity-trader, has left a lot of destruction in its wake. On Monday, there was a final vote on a debt-for-equity restricting deal that handed control to senior creditors, diluting existing stockholders. Noble was once worth $12 billion, but as Bloomberg reports, the company’s downfall had a lot to do with poor oversight from regulators.

Gold price recovers on weaker dollar. The U.S. dollar, which has climbed sharply since April, took a breather in the past two weeks, dipping 1.5 percent. The slightly weaker greenback has helped arrest the declines for gold prices. Gold jumped by 1.7 percent on Friday after the comments from the Fed. “The fact that gold climbed in response was presumably because some market participants expected that the buoyant US economy would prompt Powell to announce the kind of rate hike cycle seen for example between 2004 to 2006,” Commerzbank said in a note, before adding that “the fact that market participants had previously been very pessimistic towards gold is also likely to have contributed to the price rise.”

Commodity prices at risk as trade war escalation looms. Little progress was made in talks between the U.S. and China and the prospect of the Trump administration’s $200 billion in new tariffs on China looms. Meanwhile, Trump’s trade personnel consists of China hawks, making an escalation all the more likely. “We’re facing an escalating trade war over the next few months,” David Dollar of the Brookings Institution, and a top Treasury official in China under the Obama administration, told Bloomberg. Few commodity sectors have been spared, with soybeans, corn, pork and petroleum products already hit by retaliatory tariffs from China. Next up could be crude oil, although uncertainty remains.               

Energy   

Energy industry and State capitols criminalize pipeline protests. After protests made the Dakota Access pipeline national news two years ago, pipeline companies and their political allies in state capitols have passed a series of laws to criminalize protests against such projects. In Oklahoma, a new law would impose punishment of up to 10 years in prison for interfering with “critical infrastructure” along with a $100,000 fine. Laws such as this were replicated in multiple states in order to prevent a repeat of the Dakota Access protests.

Energy holding up NAFTA. The renegotiation of NAFTA is reportedly close to the finish line, but the incoming President in Mexico has had some issues with the energy provision. The trade deal would grant too much power to international oil companies in the view of President-elect Andres Manuel Lopez Obrador (AMLO). The negotiating team is run by officials as part of the current administration of Enrique Pena Nieto, but the trade deal will have to be approved in the Mexican Senate, and AMLO’s party will soon have a majority, giving him leverage in the current negotiation even though he has hasn’t yet taken power. Nevertheless, the U.S. and Mexico resumed talks on Monday and Reuters reports that they could be “hours” away from a deal, and Mexico’s negotiator said the energy issues had been “ironed out.”

Related: Will The S&P 500 Bull Run Ever End?

Tesla calls off taking company private. Elon Musk reversed course and said that he no longer plans on taking Tesla (NASDAQ: TSLA) private. After receiving pushback from existing shareholders, not to mention the SEC investigation that he caused, Musk scrapped the $72 billion bid to take the company private. Tesla sank more than 5 percent in premarket trading on Monday.

Cryptocurrencies

Blockchain goes to the bathroom. A company called VODXS has developed a digital advertising display to be installed in restrooms, displaying ads while people wash their hands. The displays can detect when people are near, via their mobile phone, and it plays videos, jpgs or flash content. The underlying technology uses blockchain, and the VODXS can interpret impressions from the person standing at the sink. The display can also detect whether or not employees washed their hands, allowing for greater enforcement of hygiene policies. This technology could be transferred to the healthcare industry, helping to reduce the spread of disease.

Bloomberg host launches cryptocurrency. One of the hosts of Odd Lots, a podcast supported by Bloomberg, launched his own cryptocurrency. Joe Weisenthal launched the Stalwartbucks digital currency in 2014, and they discussed on the latest episode how he did it.

SEC rejects request to list cryptocurrency funds. The SEC rejected requests to list nine cryptocurrency funds last week, a blow to the hopes for a new U.S. exchange-traded fund (ETF) that invests in Bitcoin. The SEC cited ongoing concerns about currency manipulation, fraud and market surveillance. Cryptocurrency investors have hoped for a new ETF to trade in digital currencies, but the recent rejection dims those hopes.

By Josh Owens for Safehaven.com 

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