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Weekly Market Update for September 28, 2018

by JM Hanley

The Dow was up on Friday, rising 18 points to close at 26,458. For the week, the Dow fell 1.1% (SP500 -0.5%) and year-to-date is now up 7.0% (SP500 +9.0%). The yield on the 10-year Treasury (an important interest-rate indicator) was unchanged, closing at 3.07%.

Wednesday’s meeting of the Federal Reserve went according to script. The Fed raised interest rates by a quarter of a percentage point. They also removed the word “accommodative” from official guidance, a sign that the central bank has grown more concerned about inflation as the economy booms. But in a cautious bit of doublespeak, Chairman Powell said he still considers policy to be effectively accommodative. Fed governors now say the economy will grow faster than previously thought: 3.1% this year and 2.5% the next. They still anticipate they’ll raise rates once more this year, and three times in 2019.

Italy’s debt-ridden government, now controlled by a coalition of populist parties, will increase deficit spending to 2.4% of GDP. This marks the outer bound of what analysts believed sovereign bond markets would tolerate. Banks and other financial stocks suffered this week as a result.

Italy’s debts add up to an eye-watering 130% of GDP. Anemic employment and productivity growth means that ratio is hard for Rome to recalibrate on its own. But the scale of the problem – Italy has the world’s ninth-largest economy – makes it difficult for the European Union to bail it out, as occurred in Greece. The budget drafters still need Brussels’ seal of approval, which is unlikely to be forthcoming. There’s plenty of uncertainty to come.

The price of crude oil rose 3% this week to $73 a barrel – up 21% YTD. US crude stockpiles showed a surprise build – of 1.9m barrels – while product inventories of gasoline rose (+1.5m bls) and diesel fell (-2.2m bls). Despite the somewhat weak US inventory report, oil was boosted by reports that China is cutting back on Iranian imports while benchmark prices in Oman quickly climbed $10 higher. China is the largest buyer of Oman crude, representing over 70% of Omani barrels.

Back in the US, Energy Secretary Perry denied reports that the US planned to tap the strategic petroleum reserve (SPR) despite the President’s call for lower energy prices. The US issued additional sanctions against Venezuelan President Maduro’s regime whilst speculation is rising that a multilateral military coup could emerge in the not-to-distant future. We expect oil prices will continue grinding higher as we approach the Nov. 6th restart of US energy sanctions on Iran; their exports have already declined by over 800,000 barrels per day during the past two months, ahead of the restart and faster than many anticipated.

Today marks the last day of the third quarter. Firms will begin reporting their third-quarter earnings the week after next.

*The information contained in this commentary is not investment advice for any person. It is presented only for informational purposes to assist in explaining factors that may have had an impact in the past or may have an impact in the future on client portfolios or composites. All expressions of opinion reflect the judgment of the firm on this date and are subject to change. Included information has been obtained from sources considered reliable, but we do not guarantee that the foregoing materials are accurate or complete. Clients or prospective clients should contact Ulland Investment Advisors for individualized information prior to deciding to participate in any portfolio or making any investment decision. Ulland Investment Advisors does not provide tax advice. All clients are strongly urged to consult with their tax advisors regarding any potential investment. Past performance does not guarantee future results; there is always a possibility of loss.

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