Equities and the Economy

Good morning. And Whoo-hoo! Boy did we need a day like yesterday! After days and weeks of getting mostly beaten up U.S. equities posted big, big gains yesterday with the Dow rising 390 points, 2.4%, to 16,492 with all 30 stocks in the index closing up. The S&P 500 posted a 48 point gain, 2.5%, ending at 1,968 with all 10 main sectors finishing sharply higher. The more volatile Nasdaq performed the best jumping 2.7%, up 128 points, to 4,812. Yesterday was the second best day in 2015 for U.S. stocks which followed last week’s losses which for the week were the second worse for the year.

U.S. equities followed European stocks higher where a report showed German imports and exports hit record highs in value terms in July. That was indubitably positive for equities but you can thank the Chinese government for a big portion of yesterday’s move up. Yesterday they announced yet another stimulus program and boy I bet you’d like to have it here in the U.S. Before the announcement Chinese shares were down 2%. Then came the announcement which is perhaps the singularly most bullish change in a government’s economic policy that I can remember: an abolition on taxes to be paid for dividend income on stocks held for more than a year; a halving of taxes to be paid on dividends on stocks held for more than a month but less than a year but full incomes taxes paid on dividends on stocks held less than a month. The government in China may be communist but this is one of the most vehemently pro-capitalism policies ever announced.

So where are we this morning? It’s looking good! All the major Asian indexes closed higher with China’s Shanghai ending up 2.29%. But are you ready for this shocker? Japan’s Nikkei 225 closed up (drum roll, please) 7.71%! Yes, 7.71%! That equates to an astounding 1,272 Dow points! This was the largest one day advance in the Nikkei since 2008. I’ve been writing this blog for over seven years and I’ve never seen that big of a daily move in any major equity index. European stocks are taking up where they left off yesterday with Germany’s DAX up 1.78%. Locally, it looks like a good start with U.S. equities riding the momentum wave with Dow futures up 176.

Everything above said, stocks have been crazy volatile of late and I don’t expect the volatility to diminish especially with the FOMC meeting next week and literally everyone in the world wondering if interest rate “lift off” will begin.

Oil

Equities may have been screaming higher but no one told WTI for Texas Tea closed down 11¢ at $45.94. Brent, however, joined the party rising $1.89, 3.7%, as better global risk appetite brought in buyers. According to a just released Platts survey OPEC production in August fell month to month for the first time since February. Production fell 146,000 bpd to 31.26 million bpd. Now you bulls don’t get too excited about this for OPEC is still producing close to record levels. Speaking of OPEC, Indonesia is re-applying for membership in OPEC after previously suspending itself. Now this would normally be nothing more than of passing interest for Indonesia does produce a sizeable sum of crude oil and more than several of the smaller OPEC nations. What’s unique here is that Indonesia is a net importer of crude oil. I guess the Organization of Petroleum Exporting Countries will have to change its name to simply Oil Producing Countries.

Platt’s reported that China’s crude oil import growth slowed to 5.6% year on year following double digit increases of 29% and 27% for July and June, respectively. In those latter two months imports were close to record highs with a lot of it going into storage as the Chinese government captures prices half of what they were a year ago.

This morning WTI is fairly quiet being down 19¢ as I write.

Courtesy of MDA Information Systems LLC

Natural Gas

Natural gas prices continue to meander consolidating above last month’s 10 week low. Yesterday natty closed up 5.5¢ at $2.710. And this morning its down 4.2¢. Yawn. The weather forecast continues to show cooler than normal temperatures this week for the center of the country however the eastern seaboard is experiencing a significant heat wave. For example, today’s forecast for New York City, Philadelphia and Washington D.C. is 91, 92 and 93, respectively. Those temperatures are 10-12 degrees above normal. The heat spreads to the upper Midwest in the 6-15 day time frame which will keep those natural gas fired peaking plants running even with it being the middle of September.

Elsewhere

I’ve mentioned more times than I can count how the slowdown in China’s economic growth has negatively affected the global equities and commodities markets. My statements were in most cases qualitative rather the preferred quantitative. I now have some quantitative data for you. The Wall Street Journal recently did some work on China’s commodities consumption. Listed below is China’s share of total world consumption for 20 of the world’s most important commodities. Read with awe!

China’s Share of World Consumption

Aluminum 54%
Nickel 50%
Copper 48%
Zinc 46%
Tin 46%
Steel 45%
Lead 40%
Cotton 31%
Rice 30%
Soybean Oil 30%
Soybean Meal 28%
Gold 23%
Corn 22%
Wheat 17%
Crude Oil 12%
Sorghum 11%
Sugar 10%
Palm Oil 10%
Natural Gas 6%
Barley 5%

Now you can better understand how China’s slowdown affects us all. Truly, truly amazing!