Market Morning: China Talks Downer, IMO 2020 Hoarding, Alphabet Shocks, Fed Losing Control?

Stock Market Roundup

Mnuchin Stabs China Deal With Doubts, Again

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Maybe it’s a way to lower expectations in concert with new highs in the S&P 500 in order to reinflate hope when the market falls again, but Treasury Secretary Steve Mnuchin is once again infecting the China Trade Deal saga with doubts. In a smiling picture where all three look happy and carefree as if they’re not really deciding the fate of trillions of dollars in international trade, Mnuchin is pictured schmoozing with China Vice Premier Liu He and US Trade Representative Robert Lighthizer, and quoted as wondering whether it is “time to move on” from talks. Move on to where? More tariffs on the verge of an economic contraction? Sounds like the exact move to make if you want to hasten mutual economic decline. Talks are resuming today, supposedly, with Mnuchin quoted by Fox Business saying, “We hope within the next two rounds of (talks) in China and in D.C. to be at the point where we can either recommend to the president we have a deal or make a recommendation we don’t.” This follows a litany of vague statements by both sides that seem structured to sway markets in either way, negative when they’re up, and positive when they’re down, as if they’re targeting a level for equity markets.

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Clock Ticks on New IMO Fuel Regs, Hoarders Prepare

Ships off Singapore and Malaysia are hoarding low sulfur fuel in preparation for a surge in demand come 2020 thanks to new regulations out of the International Maritime Organization (IMO), founded in the World War I era and in charge of telling all international trade ships what kind of fuel they can burn. Starting January 1 next year, ships will no longer be allowed to burn the high-sulfur dregs of oil refineries and instead will have to burn the premium low-sulfur stuff, which should bring demand for low sulfur fuel up about 5% overnight. That’s why a mini supply hub is forming in the straits off Singapore as massive supertankers start hoarding the stuff in preparation for making some quick profits. The ongoing hoarding is already affecting price in the present, bringing what would have been available for current supply off line for now. “We expect to see a whole fleet of tankers off Singapore and Malaysia taking part in a low-sulfur oil blending play that will also be found off other major ports such as Fujairah and Rotterdam,” said one Anoop Singh, analyst at Braemar ACM, a shipbrokering firm. (NYSEARCA:USO)

Alphabet Shocks, Misses Estimates, Analysts Fret, Mouths Agape

Google missed estimates. Alphabet (NASDAQ:GOOGL) shares are down 7% on the results. People are beginning to question the universe. Sales came in at $29.5 billion while Wall Street was looking for $30.04 billion. Still, revenue from Google advertising rose 15%, the slowest pace since 2015. Facebook (NASDAQ:FB) by contrast saw a 26% rise in ad sales. The culprit for Google was desktop and tablet revenue, which was flat. One concern is that instead of starting with Google to show them a product they’re looking for, they go straight to Amazon (NASDAQ:AMZN) instead and cut Google out of commissions. Tears for the bleeding giant. Alphabet was mum on the causes for the slowdown, prevaricating in its earnings call.

Fed Losing Control over Interest Rates

The effective federal funds rate, the overnight rate charged between banks, has stayed stubbornly at 2.44% for over a week now even as volume in money markets has increased by $20B over the last 4 days. Additionally, the overnight bank funding rate, which consists of the effective fed funds rate plus Eurodollar deposit rates, is up another basis points to a record 3bps spread over interest on excess reserves (IOER). Analysts at JPMorgan Chase (NYSE:JPM) believe that by the next FOMC meeting on Wednesday, the fed will push the IOER down another 5bps in order to relieve the pressure on overnight interest rates. If it doesn’t work, there could be some problems.

Remember Brexit? New Compromise Possible Now, Supposedly, but No Details

Brexit talks between Labour and Theresa May’s party are proceeding to the “nuts and bolts” phase, where the two sides discuss things such as bolts, and also nuts. Though this could be a Mnuchin-type move where expectations are built up to support British equity markets, which haven’t actually been doing too bad lately since Brexit was postponed until Halloween, or indefinitely, whichever comes second. According to reports, “no new offer” from the government has been put on the table but participants emerged with a new optimism about a change in tone”. Well that’s concrete. Good job. Pat on back. Exciting. Now that we know all the details, we can move on in peace.

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