Equities and the Economy

After days of grief U.S. equities finally had a descent day with the Dow closing up 116 points, 0.74%, at 15,883, the S&P 500 up 10, 0.52%, to 1,869 while the Nasdaq closed flat to Wednesday at 4,472. Remember though that the Nasdaq performed relatively well during Wednesday’s Chernobyl so its performance is not surprising to me. Specifically, the biotechnology sector, which bounced 2.3% on Wednesday, gave back 2% of that yesterday holding the Nasdaq down.

The correlation between oil and equities continues to hold with oil prices jumping yesterday which will be discussed below. I’m not sure whether oil prices drive equities or vice versa but there’s no question they’re inextricably linked right now. As I’ve been stating, the market is way oversold and was primed for a bounce. Additionally, it seems that when CNN’s Fear & Greed Index gets into single digits, which it was, we only need a spark to bring in buying. That spark was ECB President Mario Draghi implying at the ECB’s post meeting press conference yesterday that more QE may be announced at its March meeting. If it’s one thing we’ve learned over the past 7 years it’s to not fight the Fed. Don’t fight the central bankers. Any announcement of QE by a central banker means buy equities, or at least cover your shorts. By the way, markets are thinking that the People’s Bank of China and the Bank of Japan may join the ECB with new QE action. Speaking of the Fed, although the Fed a month ago stated they’re thinking interest rates would rise 3 more times this year, the market doesn’t think so after this latest move down in global equities. Fed fund futures, the market’s bet on interest rate movements, is currently pricing in only a 22% probability of another interest rate hike a the March FOMC meeting vs. nearly 50% a month ago. The Fed, as well as the Bank of Japan, meet next week.

Economic data-wise, the primary report was weekly jobless claims which raised eyebrows coming in at 293,000 and above expectations of 278,000 as well as higher than last week’s 283,000 and also being the highest number since July. Now the early weeks of the year are usually subject to seasonal volatilities so we need more data. However, the Fed is keying on two areas, inflation and employment. If employment shows signs of weakening the Fed will definitely delay an interest rate high. With oil prices falling inflation sure isn’t rising.

This morning we’re getting a nice follow through to yesterday’s action with the Dow up a nice 227 points. This follows positive action in the Asian market which closed up between 1.25% and a huge 5.88% which was in Japan and it’s biggest move up in 4 months. The love spread to Europe where the markets there are performing even better with the major indexes up between 2.19% and 3.49%. Also helping assets are higher oil prices this morning, or is it the other way around?! So the question is: “Is this a correction to the correction, or have we seen the low?” If I knew I wouldn’t be writing this right now.

Oil

As mentioned above, oil prices bounced yesterday with WTI closing up $1.18, 4.2%, at $29.53 and Brent gained $1.37, 4.9%, settling at $29.25. Prices rose despite a bearish EIA crude and products report which showed crude inventories rose 4.0 million barrel which was slightly above expectations of 3.8 million. Distillates (diesel, heating oil and jet fuel) fell by 1.0 million barrels with expectations of unchanged so this was bullish. The big surprise was gasoline inventories which rose a whopping 4.6 million barrels and way above expectations of 1.2 million. So why did oil prices rise. Similar to equities, the boat was listing too heavily to the short side and needed righting.

This morning and similar to equities, oil prices are higher with WTI up $2.15. So where do we go from here? I can see WTI getting to around $35/bbl. After that it’s going to hit some serious and fundamental resistance. From where you ask? From hedging. At $35ish the one year forward WTI price will be about $40 and this will bring in producers and hedgers whose hedges have expired and who have not initiated new ones not wanting to hedge at the current low prices. By the way, the producers will be seriously “encouraged” to put hedges on at around $40 by the banks who’ve funded their drilling programs.

Courtesy of MDA Information Systems LLC

Natural Gas

Natural gas prices were materially higher in the morning rising on the helium balloon of the current strong cash market, and then the EIA popped the balloon. Their weekly natural gas storage report showed the U.S. withdrew 178 Bcf from storage last week which was materially less than forecast of 190 Bcf. This brought prices back down, but not negative, with natty closing up 2 cents on the day at $2.138. Still February gas at $2.18. Incredible. Once this cold snap is over, as well as the Snowageden forecast for today and tomorrow for the northeast, above normal temperatures are forecast for New York and New England with the upper Midwest, including Chicago, to be above normal. When we get to the 11-15 day time frame the entire eastern third of the country is above normal. That being said, the weather models are hinting the Midwest could once again see some below normal temperatures past the 15 day period. Natty is down 1.3¢ as I write.

Elsewhere

Our U.S. navy is going green. On Wednesday it launched its first carrier strike group powered partly by biofuel calling it a milestone toward easing the military’s reliance on foreign oil. The maritime branch touted the warships as the centerpiece of its “Great Green Fleet” as part of a Navy-wide initiative with the goal of producing 50% of its power from alternative energy in four years. The fuel mix is 10% biofuel, made from beef fat, and 90% petroleum. The Navy originally aimed for a 50-50 mix but the cost was too high. This first group of ships consists of a nuclear powered aircraft carrier, a guided missile destroyer and other ships with the destroyer and three other ships operating on the biofuel blend.

The Defense Department is the world’s largest consumer of energy and the Navy accounts for more than a third of the total. The Navy bought 77 million gallons of the 10% biofuel mix at $2.05 a gallon. The purchase comes after a 2012 demonstration of the Navy’s use of alternative fuels drew fire from lawmakers outraged at the $26 per gallon price tag. Legislatures have since passed a law prohibiting the Pentagon from buying biofuels in mass unless the price was competitive with petroleum. Have a good weekend.