Equities and the Economy

Good morning and happy No Socks Day (should have told you this yesterday!). What you all saw yesterday was equities bounce back somewhat with the Dow adding 83 (0.46%) to 17,924, the S&P 500 up 8 (0.38%) to 2,088 and the Nasdaq close up 26 (0.53%) to 4,946. But to use a metaphor, you were looking through a telescope at one small piece of the sky with 99% of the heavens outside your vision. I say this because what I bet you didn’t catch was that German bonds rallied yesterday from a massive sell off this week pushing yields lower which boosted equities with Germany’s DAX closing 0.51% higher which helped boost U.S. equities (note the Dow closed up about as much as the DAX) strengthening the U.S. dollar weakening commodities, including oil which got knackered. Markets across continents and products are intertwined. It’s like Walter Scott said “Oh what a tangled web we weave.”

Some positive news yesterday came from the Labor Department which stated first time unemployment applications fell by 4,250 last week dropping the 4 week average to the lowest level in 15 years. The 4 week average is looked at more by investors than the more volatile weekly number and seen as a more accurate predictor of labor-market trends.

The U.S. dollar registered its best day against the euro in about a month yesterday gaining 0.65%. Regarding Greece, ever since the removal of the vociferous Greek Finance Minister Mr. Varoufakis from the Greek negotiating contingent things have become much more quiet as the sherpas negotiate behind closed doors rather than Mr. Varoufakis’ preferred method of using the media.

The Big Kahuna of reports comes out today and that is the Labor Department’s Employment Situation Report. This is a report that investors use to get an insight into what the Fed may be thinking regarding interest rate policy. Refreshing your memory, Wednesday’s ADP private payroll report was anemic.

I came in this morning and markets around the world are looking the best they’ve looked all week with all the major Asian bourses closing higher led by China’s Shanghai which is up 2.28% but this is after losing 8% this week. Europe’s markets are all trading in the green with London’s FTSE leading the way up a big 2.00% after a resounding and surprising victory by the Tories in the UK elections. Going into election day the polls showed the election was too close to call but not only did the Tories win, they increased their seats in Parliament. Mr. David Cameron will remain Prime Minister for another 5 years.

The jobs report just came out and nonfarm payrolls increased 223,000 in April with the expectation of 228,000. The unemployment rate fell to 5.4%, the lowest since May 2008. More on this on Monday. Investors like the data. Dow futures leapt from being up 48 to 110 as I write.

Oil

The DOE’s report on Wednesday may have been bullish pushing oil prices higher but the dollar’s big rally yesterday crushed oil with WTI falling $1.99 (3.3%) closing at $58.94. Brent fell $2.23 (also 3.3%) settling at $65.54. When I was doing my research I found excuses such as worries about how much oil Iran can add to the market and facts about U.S. production and inventory levels and Russian and OPEC production but this is not new news. The fact was the oil market was over extended to the long side after numerous days of grinding higher and a correction was due. The dollar’s strength was the catalyst. By the way, Brent broke a shorter term trend line dating back to the beginning of April indicating from a purely technical perspective $61-$62 is the next target.

Today Baker Hughes releases its weekly rig count report which I’ll report on Monday.

WTI is bouncing back from the bludgeoning it took yesterday with WTI being up 88¢ supported by a report today that Chinese imports in April climbed to a record 7.4 million bpd.

Courtesy of MDA Information Systems LLC

Natural Gas

The EIA released its weekly natural gas storage report yesterday noting that 75 Bcf was injected into U.S. storage facilities last week. This was pretty close to market expectations of 73 Bcf. The market initially sold off then climbed back to unchanged and then slowly eroded as the day went on ending the day 4.2¢ down at $2.734. The black hole’s gravity continues to be at work. If I was a commodities trader with capital to put at risk I would definitely not be using it trading natural gas! No money to be made here!

Yesterday and for the next 5 days temperatures in the east will be materially above normal which is increasing cooling degree days and the natural gas burn for electric generation. For example, the high in Cincinnati today will be 15 degrees over Wednesday’s forecast. Traders are picking up on this and pushing natty is up 6.0¢ as I write.

Elsewhere

Here’s an example of how a company must build risk into the equation when dealing with organizations in foreign countries. The courts in Brazil have “forced”, Petrobras, the oil company there which has been embroiled in corruption related problems, to cancel rig contracts with National Oilwell Varco. Those contracts were for a total of $3.3 billion and were 30% of NOV’s “backlog” that it had proudly reported in its financial statements. That’s got to hurt. And it did. NOV’s stock is down 7% the last few days. Have a good weekend.