Equities and the Economy

Good morning. Here’s something I bet you wouldn’t expect me to tell you this morning. The S&P 500, which gained 20 points (0.94%) yesterday to 2,088, closed at its highest level this year. Now we’re not at its all-time high set on December 29th at 2,094, but we’re getting pretttttty darn close! Optimism in equities was driven yesterday by three factors. First, the new of a cease fire in Ukraine, while tenuous, is a positive move. Second, oil prices moved materially higher (more on that below) and as I’ve mentioned previously, equities are taking some price direction from oil prices, and thirdly, merger and acquisition news with Expedia and Orbitz Worldwide talking of merging. Those two stocks were up 15% and 22%, respectively.

The other bellwether indexes fared well too with the Dow jumping 110 points (0.6%) to 17,972 and the Nasdaq adding 57 points (1.18%) to 4,858. This is the Nasdaq’s highest level since 2000. The heaviest weighted component of the index, Apple, has been on a tear rising 6.3% over the past 4 days.

There was some fundamental data out yesterday which was retail sales (sometimes called “resale tales”!) showing sales fell 0.8% in January which was worse than a consensus of a fall of 0.4%. Although the monthly number looked bad year-on-year sales are up a healthy 3.3%. Sales excluding autos as down 0.9% and led by falling gasoline prices. It appears consumers are spending their savings from lower gasoline prices at restaurants and bars for they were the strongest category of sales in January. Importantly, retail sales excluding gasoline rose 6.6% y-o-y which is the strongest advance since the spring of 2011 meaning the consumer is feeling pretty good and spending.

This morning Dow futures are comfortably being up 23 points riding the coattails of higher European stocks. We’re getting up at resistance levels so don’t be surprised if we find some selling going on here. There are a couple of important reports out today and they are the University of Michigan’s Consumer Sentiment figures for February and import-price data.

Oil

Oil has been rallying of late primarily driven by 1) an egregiously oversold market, 2) traders trying to get ahead of the trend focusing on the rig count, more specifically the decline of it and, 3) the continued announcement of capital budget cuts and layoffs by oil and gas producers. By the way, that report from Baker Hughes will be coming out this afternoon and I’ll comment on it on Tuesday. Yesterday WTI jumped $2.37 closing at $51.21 and Brent closed up $2.39 at $57.05. Brent seems to be leading the way with the Brent/WTI spread widening to $7.22 from $5.89. Although WTI’s contango tightened a little yesterday perspective is needed here. Six months ago WTI’s year spread (front month at the time to the same month 12 months later) was a $3.45 backwardation. It is now $10.16 contango! That is a swing of $13.61. HUGE! Obviously there is much more current supply than demand.

This morning the slick stuff continues to rally with WTI up $1.87. Brent is over the $60 mark for the first time in 2015. Possibly supporting oil prices this morning is a report of 1 million bpd being curtailed due to some bad weather in Iraq but I truly believe the big driver is traders not wanting to be short, or covering shorts. They may not want to be long but they are definitely covering shorts. Being oil prices fell continuously since the summer this is no range to trade. There are other technicals and they are being closely watched, but there is no range identifiable right now. That range is being formed as we sit. I must add that the rally in global equities I’m sure is supporting oil prices.

Courtesy of MDA Information Systems LLC

Natural gas

The EIA released its so closely watched weekly natural gas storage report yesterday showing the U.S. withdrew 160 Bcf last week. The market was expecting a number closer to 165 Bcf and natty sold off somewhat closing down 8.4¢ at $2.713. The only reason it wasn’t a capitulation was because the weather forecast is showing some bitterly cold weather now and for the next couple weeks. I mean freeze your keister off cold with record setting lows for parts of the MidAtlantic and the northeast. So we have dark blue and even purple all over the map and yet natty can’t even make it over $3.00. Hmmm. This morning natty is pretty quiet being down 1.8¢.

Elsewhere

Many, many times I’ve mentioned the relationship between the strength of the U.S. dollar and the price of commodities. Specifically, with all things being equal (which is rarely the case!) a stronger dollar puts price pressure on commodities. Well here’s some evidence. Back in early 2011 when the CRB Index, a broad based commodity futures price index, was at a multi-year peak at approximately 360 when the U.S. dollar index was at or near 73. The CRB index is now near 220 while the U.S. dollar index is near 96. Indeed, the peak of the past several decades in the CRB was approximately 460 back in the summer of ’08 when the dollar index was 71. Since that time the CRB has fallen more than 50% and the dollar has risen 35%. So you can see that there definitely is a relationship, and that relationship must be respected.

On a logistical note, the Morning Energy Report will not be published Monday due to the holiday, and I have the day off. Have a great weekend.