US Stocks Hit New Record

Daily Analysis - 08/02/2017

Equity Benchmarks Rise Despite Biggest Trade Gap Since 2012


The Dow Jones Industrial Average and Nasdaq Composite reached new heights on Tuesday despite several disappointments on the data front.  The US trade deficit widened significantly during 2016 as evidenced by the trade report for December while the number of job openings stayed relatively stable for the period.

US Debt Ceiling Back in Focus

Amid reports that the US Government ran a near $1 trillion deficit during the 2016 calendar year, the stage is being set for another breach of the US debt ceiling.  Although the Trump Administration is likely to raise the debt ceiling shortly with the move backed by Treasury Secretary nominee Steven Mnuchin, there is only a limited likelihood of the US defaulting on its debt, but it has nevertheless raised the issue of fiscal responsibility.  With the President promising to trim budgets and focus more on fiscal discipline, lower spending may negatively impact stocks despite the recent rally in equity indices.

Adding to the troubling government spending reports is the widening US trade deficit which printed at $502.25 billion, marking the highest point since 2012.  Nevertheless, stocks managed to display a positive response, with the S&P 500 climbing for four of the last five sessions.


French Stocks Collapse as Bond Yields Rise Amid Political Uncertainty

With anti-EU sentiment building across Europe, all eyes are focused on the upcoming elections in France and Germany.  A political scandal surrounding Republican candidate Francois Fillon has pushed the far right National Front party into the lead for the first round of voting per the latest polling.  Although Nation Front leader Marine Le Pen is not forecast to win the Presidency in the second round of voting, the developments are adding to financial market’s sense of uncertainty, pushing French bond yields higher as investors sell.

This activity has seen the spread with comparable Germany yields widen the most since 2012 as sovereign risks rise amid the heightened “Frexit” rhetoric from certain campaigners.  The result was a steep drop in French stocks on Tuesday, with the CAC 40 benchmark extending Monday’s losses before managing to close the session mostly flat.


Oil Folds on Near Record Stockpile Builds

According to the weekly report released by the American Petroleum Institute on Tuesday, crude oil inventories rose by the second biggest amount on record during the week ended February 3rd.  Stockpiles climbed by 14.270 million barrels during the period, beating expectations of a 2.500 million barrel build by a wide margin.  While ahead of the official data due from the Energy Information Administration later in the session, the figures give the sense that the energy glut is persisting, potentially presenting a new catalyst for a steep fall in prices.

WTI futures reacted negatively to the development, falling to the lowest levels after breaking below $52.00 per barrel.  Not helping matters was a reduced global demand forecast from the EIA alongside projections of US output climbing to the highest point since the 1970s in 2018.  Although futures are slightly higher after Tuesday’s decline, the EIA report may quickly erase those gains.


Copper Climbs as Potential Strikes Raise Shortage Fears

After a spectacular rally following the American election in the fall, copper prices are once again on the rise as workers threaten to strike at one of the biggest production facilities on the planet.  BHP Billiton’s Escondida mine is set to be shuttered ahead of planned worker walkouts following a breakdown in negotiations between the company and the government.

As of 2015, the mine accounted for nearly 6.00% of global output and labor negotiations at the site are considered highly relevant for the entire industry.  With supply tightening for the industrial metal amid a reduction in capital expenditures following a multi-year investment binge, this strike could ignite a sustained rally in prices.  In the meantime, copper is pushing back towards multi-month highs, with November’s heights in sight.


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