New Chinese Tariffs Drive Markets Lower
August 2, 2019
Crude oil and refined fuel product prices started the day down after the Fed Chairman’s said there will not be a string of interest rate cuts and that the .25% cut was more of a midcycle adjustment.
Crude prices and equities crashed however, after news that President Trump plans to implement new 10% tariffs on the remaining $300 billion of Chinese goods and products into the U.S.
China has said that they will response/retaliate but there was no elaboration on what that could involve.
This was the largest front month decline (7.9%) in the nearby WTI crude oil month since February 4, 2015 mainly due to fears of a world economic slowdown with perceived lower fuel demand. In Brent crude a decline of 7% or more has only happened on 44 days during the last 30 years.
The U.S. dollar index reached a 2-year high yesterday after the Fed cut the Federal Funds interest rate by .25%, which did put significant downward pressure on crude oil prices in general today.
Also bearish for prices yesterday, Concho Resources Inc. fell 16% after the shale producer missed second-quarter profit expectations and forecast weak current-quarter output. Whiting Petroleum and Chesapeake Energy also posted worse than expected Q2 earnings with their stock prices falling by 39% and by 8.8% today, respectively.
Also bearish for prices, there are plenty of crude oil supplies throughout the world even given the recent massive declines from U.S. crude oil stocks. This is partly due to the U.S. growth in crude oil production rising by 3 million bpd since January of 2017 up to a recent total of 12.2 million bpd last week.
On a positive note, ADP reported yesterday that 156,000 new private jobs were created in July, which was slightly better than economists’ expectations. June was also revised up by 10,000 jobs. The outlook for today’s government job number is that 165,000 positions in July.
Last week, the European Central Bank president said the outlook for the Eurozone economy was getting “worse and worse” particularly in the manufacturing sector. The ECB signaled it was preparing to add additional monetary stimulus as soon as its next meeting in September.
Growth in US factor activity slowed to its weakest in nearly three year in the month of July. The Institute for Supply Management said its index of national factory activity fell to 51.2. A reading over 50 means growth and below 50 contraction. The 51.2 reading for July was the lowest since August 2016.
Yesterday saw some strong selling after the President Trump’s tweet about more tariffs. Here is an interesting fact from John Kemp of Reuters; Brent crude oil futures sharp drop was highly unusual: futures prices have only declined by 7% or more on 44 days during that last 30 years.