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News, January 2020
US Stocks Sink, Havens Jump on Rising Tensions Due to the Assassination of General Qassem Soleimani in Iraq
January 3, 2020
Dow tumbles more than 200 points on rising Iran tensions
Friday, January 3, 2020, Updated 9:46 AM ET,
Oil prices spike after US kills Iranian general
New York (CNN Business)--
The Dow and US stocks fell sharply Friday after the United States killed a top Iranian commander at a Baghdad airport.
The military strike concerned investors about the potential for a major escalation in Middle East tensions. See what's driving markets now
The Dow (INDU) traded down 0.8%, or 240 points, within minutes of the opening bell. The S&P 500 (SPX) opened down 0.8% as well, and Nasdaq Composite (COMP) futures were down 0.9%. US oil futures jumped some 3.5% to more than $63 a barrel. Oil prices haven't been this high since September, when Iran attacked Saudi Arabia's oil production facilities. Iran denied responsibility for that strike. Oil also occasionally soared last year during times of tension in the Strait of Hormuz, when a number oil ships in that crucial Middle East channel were attacked.
If the attack sets off a prolonged rise in tensions between the United States and Iran, oil prices could continue to rise, and markets could remain unstable for some time. Read More President Donald Trump tweeted "Iran never won a war, but never lost a negotiation." Trump walked away from his predecessor's Iran Nuclear Deal, but the tweet suggests he wants to get Teheran back to the negotiating table. "Both Iran and the US have shown a reluctance in the past to embark on outright conflict, but this does not preclude a period of heightened tensions and elevated oil prices," wrote Caroline Bain, chief commodities economist at Capital Economics. Oil prices were already on an upswing before the escalation, Bain added, and she noted oil supplies might not be affected by the conflict, because Iranian oil exports are already curtailed thanks to US sanctions.
Yet if tensions rise, the conflict could spill over to other regions. "Given the scope for tension to persist in the Strait of Hormuz, a protracted period of higher oil prices has to be a risk," said Kit Juckes of Societe Generale in a note to investors. Oil prices could rise to $80 if the conflict spreads, noted Henry Rome, Iran analyst at Eurasia Group. Higher oil prices would eventually reach consumers at the pump, hurting the American economy, which relies heavily on consumer spending. A hit to American wallets could spell a bad start to the year.
Safe haven currencies, which tend to spike during times of trouble, climbed higher. The US dollar was up and the Japanese yen soared to its best level since November against its US rival. Gold soared 1.3% to a four-week high, due to the same dynamic of investors putting their money into safe assets. Treasuries edged slightly higher Friday. When prices rise, yields fall: the 10-year US bond yield fell to 1.83%, down from 1.92% from the previous day. Qasem Soleimani, commander of the Quds Force of Iran's Islamic Revolutionary Guards Corps, was killed in the strike at Baghdad International Airport. The Pentagon said that Soleimani was "actively developing plans to attack American diplomats and service members" and that the strike was aimed at "deterring future Iranian attack plans." Iranian President Hassan Rouhani said in a statement that his country would take revenge for the killing of Soleimani.
The Middle East is home to major oil producing countries and key energy supply routes. The killing of an Iranian general could disrupt business and trade with crucial partners in the region. At least for now, the attack has undone the positive sentiment that fueled the US stock market over the past several months. Markets kicked off 2020 with a bang Thursday, when the Dow rose more than 300 points. Stocks soared last year: the S&P 500 was up nearly 29%, its best performance since 2013, fueled by the Federal Reserve's rate cuts and hope that the United States could resolve its trade war with China.
U.S. Stocks Sink, Havens Jump on Mideast Flare-Up: Markets Wrap
By Sarah Ponczek
Bloomberg, January 3, 2020, 9:44 AM EST
Oil surges and gold rallies after U.S. kills Iranian commander Risk-off mood spreads across assets, dashing new year optimism
Escalating tensions between the U.S. and Iran sent stocks lower and spurred demand for haven assets including gold, the yen and Treasuries. Oil surged.
The S&P 500 Index headed for its biggest drop in a month after a U.S. airstrike in Baghdad killed a top Iranian commander and the Middle Eastern country’s leader threatened “severe retaliation.” The VIX Index, a measure of equity volatility, jumped the most on a closing basis since August. The Stoxx Europe 600 Index also slid. Energy companies bucked the retreat after West Texas oil at one point rallied almost 5%.
“The market’s recently diminished trade-war concerns have erupted overnight into the fear that a real war will take place,” said Chris Rupkey, chief financial economist at MUFG.
The yen strengthened, gold hit the highest in four months and the yield on 10-year Treasuries looked poised for the biggest drop in three weeks as government bonds rallied. The euro weakened and the DAX Index led regional stock declines amid conflicting signals from German economic data.
The developments in the Middle East derailed a bullish mood that pushed the S&P 500 Index to a record high Thursday after a blockbuster 2019. Traders had returned from holidays to the news that China’s central bank had moved to support the economy and President Donald Trump expected to sign the first phase of a trade deal with the Asian nation on Jan. 15. Beijing has yet to confirm the date.
The flare-up could “dash market hopes for a rebound of the global economy that is still to emerge from under the cloud of the U.S.-China trade war,” said Valentin Marinov, the London-based head of G-10 currency research at Credit Agricole SA.
Most shares in Asia slumped, though equities in Japan didn’t trade because of a holiday. A gauge of developing-nation stocks joined the sell-off, though equity markets in the Middle East are largely closed for the weekend.
Here are some events to watch for this week:
Federal Open Market Committee minutes will be released on Friday. U.S. ISM manufacturing is also due. The Institute for Supply Management’s PMI is forecast to show a contraction for a fifth month.
— With assistance by Gregor Stuart Hunter, Alexander Kwiatkowski, Joanna Ossinger, Adam Haigh, Anooja Debnath, and Sam Potter
The stock market is on fire. History shows that won't last
Updated 12:13 AM ET, Fri January 3, 2020
New York (CNN Business)The melt-up on Wall Street has reached historic proportions.
If history repeats itself we'd see sideways action in January and February and outright declines in March and April."
Paul Hickey, co-founder of Bespoke Investment Group
Bespoke Investment Group ran the numbers and confirmed that Wall Street has rarely experienced a period as decidedly bullish as late 2019. The firm calculated how often during the trading day the S&P 500 was up versus the prior days' close over a rolling 50-day trading period. And Bespoke found that in late December, the S&P 500 was in the green on an intraday basis over 65% of the time — a level surpassed only a handful of times since the firm's intraday numbers began in 1984.
That extremely bullish pattern continued Thursday. The Dow kicked off 2020 by climbing more than 300 points, or around 1%. Read More "It's like we have a TiVo on: We're just watching the same show, day after day," said JJ Kinahan, chief market strategist at TD Ameritrade. Those stellar gains have padded Americans' investment portfolios. And the market boom could instill further confidence among households and CEOs in the sustainability of the economic expansion.
'The fun didn't last'
Yet history shows that such consistently positive market performance doesn't last. And it can actually be a negative omen. After the past six times when the S&P 500 enjoyed such positive returns, the index averaged a slight decline of 0.4% a month later, according to Bespoke. Sideways trading wouldn't be so bad given how much stocks have spiked. The problem is that three months later, the S&P 500 was down every time, averaging a decline of 6.4%, Bespoke found. And even within six months, the index was down by an average of 3.6%. What 2020 could bring for the stock market "The fun didn't last," Bespoke co-founder Paul Hickey wrote in a note to clients on Thursday. "If history repeats itself we'd see sideways action in January and February and outright declines in March and April." That's what happened in late 2018 when US stocks tumbled after a similar period of extreme bullishness.
Easing trade war and easy money
None of this means the bull market in stocks is about to end. There are good reasons for the market rally. The United States and China have stopped firing shots in the trade war, for now at least. The two sides reached a phase one trade deal that prevents new tariffs from getting imposed and rolls back some existing tariffs. Although the deal does not end the trade war, it does ease the biggest risk facing the United States and global economy. "We don't expect a global or US recession, and anticipate a modest growth and profits rebound now that worst case trade outcomes may be avoided," Michael Cembalest, chairman of market and investment strategy at JPMorgan Asset & Wealth Management, wrote in a note to clients. The melt-up in stocks has also been fueled by easy money from the Federal Reserve. The US central bank cut interest rates three times last year. Those rate cuts made risky stocks look more attractive relative to ultra-safe government bonds. Moreover, the Fed has injected vast amounts of cash into the financial system in a bid to ease stress in the overnight lending market. Although the Fed's rescue of the overnight lending market may not have been intended to boost stocks, analysts believe it's doing just that.
There is an obvious risk that market sentiment has gotten ahead of fundamentals. The CNN Fear & Greed Index is sporting a score of 97, essentially signaling maximum greed. Market valuations also look elevated. The S&P 500 is now trading at 18.9 projected earnings, according to Refinitiv. That's up from just 16.9 in early October and well above the 10-year average of 15.2. Investors think the Fed is doing QE again. That's giving markets an artificial boost The market valuation of the S&P 500 is roughly 199% of the nation's GDP, according to JPMorgan. That's in the 99th percentile historically. Similarly, JPMorgan said that the S&P 500's enterprise value is 2.5 times sales. That's also in the 99th percentile historically. However, other metrics, including free cash flow yield and the S&P 500's earnings yield relative to 10-year Treasuries don't look out of whack with recent history. "Valuations are high, and we are starting to see cracks in risky and poorly underwritten investments," JPMorgan's Cembalest wrote. He pointed to investors avoiding the energy sector after a decade of weak performance and the recent poor performance of some 2019 tech IPOs. (That's not to mention the implosion of WeWork's attempted IPO). But valuations are notoriously poor timing tools. High valuations can go higher. And betting against this bull market has been a recipe for disaster. Horseman Capital Management, one of the most bearish hedge funds in the industry, suffered a staggering loss of nearly 35% last year at its flagship fund, according to a spokeswoman. Still, TD Ameritrade's Kinahan warned investors not to get lulled into a false sense of security by the string of records on Wall Street. "Things don't go up forever," Kinahan said. "You have to be cautious about saying, 'Everything is at all-time highs, so I'm all in.'"
The key will be whether Corporate America can live up to the hype created by Wall Street. Quarterly earnings have to essentially grow into the lofty expectations built up by the market. "The reality has to meet the anticipation," Kinahan said.
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