As Congress heard testimony from FBI director Comey and others on Russia, the election, and wiretapping allegations, stocks and crude oil fell. Meanwhile, the UK set at date for the start of Brexit negotiations.
By Vikram Rangala
Monday, March 20, 2017
Investors had some reason to have their focus diverted to political developments Monday, as the House Intelligence Committee heard testimoney from FBI Director James Comey. Comey confirmed that the FBI is investigating Russian interference in the presidential election. He also said he had "no evidence" that Trump Tower's phones had been wiretapped prior to the election.
Politics doesn't always affect the markets, but the White House and Congress are about to move forward with two of their major goals: a repeal and replacement of Obamacare plus a budget which contains severe cuts to education, the environment, and programs to help the elderly and veterans combined with a massive increase in military spending. The cuts and increases mean major changes to several of the key sectors that make up the S&P 500, including healthcare and manufacturing.
The president's low approval ratings and damaged credibility may make political support of those initiatives, especially by members of Congress in vulnerable seats, more difficult to achieve. Nevertheless, the president is moving forward on his agenda.
US Stocks fell slightly as Chicago Fed President Charles Evans said that one or two additional rate hikes this year might be warranted to keep the robust economy from accelerating inflation. Other Fed officials will speak this week, including Chair Janet Yellen.
Meanwhile, crude oil prices continued the slide of the last two weeks, falling for the ninth time in 11 days to below $49 a barrel. The main reason this time is not OPEC or even Saudi Arabia's compliance with the OPEC output limit agreement. The excess oil production is coming from the world's largest oil producer, the United States. The ironic part of this unusual turn of events is that much of the US production comes from shale oil.
Producing refined petroleum products from shale is much more expensive than drilling in more favorable well environments. Where Saudi Arabia's cost of production is effectively under $20 a barrel, the cost of shale is about triple that amount. By most estimates, it is above $50 and closer to $60 for most shale drillers in the US and Canada. That means that US producers are at best barely breaking even on the oil they are producing. The other benefit of all this pumping, however, is to maintain market share and that seems to be the goal right now for both the US and Russia.
Both the pound and euro fell Monday as UK Prime Minister Theresa May announced March 29th as the date when her government will formally invoke Article 50 of the EU charter, initiating a two-year process of exit from the European Union. With the US pursuing an "America First" trade agenda and new overtures being made to form trade pacts between the EU and China, Germany and Japan, and others, the UK is also talking about new possibilities for bilateral and multilateral trade agreements.
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