Equities and the Economy

In Friday’s Blog I stated that it looked like U.S. stocks on Thursday were gaining traction. Well on Friday they were like John Force at Lucas Oil Raceway screaming down the track at top speed and crossing the finishing line on their highs of the day. The Dow went ballistic closing up a huge 396 points, 2.47%, at 16,466, the S&P 500 shot 47 points higher, 2.46%, to 1,940 and the Nasdaq popped a whopping 107 points, 2.38%, at 4,614. It was a very, very good day! The Bank of Japan was the catalyst for the move up with a surprising announcement on Friday they were going to begin charging negative interest rates. Now that’s a QE for the Japanese economy and not the U.S. economy but U.S. investors interpreted the news that the accompanying debasement of the yen would add another layer of pressure for the Fed to avoid its tightening policy. The FOMC at its December meeting indicated there likely would be four hikes to interest rates in 2016. However, traders are pricing in almost no chance of a move this year with the first better-than even possibility not until February 2017. So this in itself is a move toward easier monetary policy, which we know is good for equities, but a concern I have is the Fed is developing a huge communication problem. They were signaling an interest rate hike would be coming in March but that is almost certainly not going to happen. So one has to ask, “Does the Fed have any idea what’s really going on in the economy?!” It doesn’t give investors comfort if the Fed sends mixed messages.

January 2016 was a crazy month for stocks. Both the S&P 500 and Dow had while gyrations. For the Dow it was the most tumultuous since October 2014 and the S&P since October 2011. Fortunately, the month ended on a good note but unfortunately it was a tough start to the year. The Dow was down 6% in January, the S&P 5.6% and the Nasdaq 8.4%. Why do I have the feeling January’s volatility is not going to be unique in 2016?

We’re starting the week on a weak note with U.S. equity futures lower. Dow futures are down 87 points. They’re following their European counterparts which are all trading in the red between 1.06% and 1.21%. Equities this morning are being somewhat weighed down by some negative data out of China this morning showing factory orders fell for a 6th consecutive month hitting a 3 year low. The Caixin PMI index, while coming in slightly better than forecasted at 48.4 (48.1 forecasted) remains below the all-important number of 50 separating growth from contraction. The data adds to the to the growing policy dilemma facing authorities – implementing further stimulus to boost economic growth which in turn could exacerbate capital outflows and place more pressure on the yuan. And oh, did I mention oil prices are lower this morning?!

As I stated, we’re lower this morning but let’s see where we close for closes are much more important than opens.

Oil

Oil prices climbed marginally on Friday with WTI settling 40¢ higher at $33.62. Brent added more, 85¢, closing at $34.74. The theme that sparked oil’s recent rally remained and that was the announcement of talks of cooperation between Russia and OPEC which would include a 5% cut in Russia’s production. The announcement of the talks was enough to send prices higher in a market that was already oversold. The recent rally in prices has worked off the oversold conditions. The CFTC reported last Friday in its Commitment of Traders report that hedge funds increased their long position in WTI to the most since 2010. I would be very, very surprised if Russia and OPEC, i.e. Saudi Arabia cooperate to cut production. Russia needs every bit of hard currency having a drop of GDP last year of a very material 3.7% and Saudi Arabia knows if it cuts production, to raise the price, Iran or the U.S. shale producer will take their market share.

On the weaker Chinese data traders came in selling oil with WTI down a material $1.15 this morning. Adding to the bearish sentiment, the Iranian oil ministry said over the weekend the country would be boosting production by 160,000 bpd in late February or early March when expansion projects at two oil fields would be completed.

Petrobras, the corruption beleaguered Brazilian oil company, said late last week it could produce oil from its subsalt areas offshore for an amazingly low $8/bbl. Wow!

Courtesy of MDA Information Systems LLC

Natural Gas

Natural gas prices spiked on Friday closing 11.6¢ higher at $2.298. The combination of the forward cool weather forecast with residual support from Thursday’s EIA storage report showing not only the largest withdrawal this winter but also way over last year and the five year average brought in the bulls. Things are a little strange this morning for although the weather forecast is little changed from last week showing some quite cold weather for the upper Midwest, natty is down 13.1¢ as I write. Now I must add the 6-10 day period warmed up somewhat for the northeast but today’s down move is not proportional to the change in the weather forecast. I need to check the cash market for it may be very weak this morning with the very warm temperatures the Midwest and east are having right now. Cincinnati will be 18 degrees above normal the next few days and Philadelphia is expected to be 20 degrees above normal this Wednesday. Houston will be hitting 77 degrees today but, alas, the great weather we’ve had the last few days will be exiting and we’ll be back with highs in the 50’s.

Elsewhere

I read that Apple’s talking about offering a wireless iPhone charging system in 2017. So I’m thinking “What’s the big deal? Samsung, LG and Microsoft already have wireless charging systems.” Ah, but this is Apple. Their system, get this, would not require the phone to rest on a mat or charging plate! The phone would recharge as long as it was within the required distance from the charging station. Apple is supposedly going to dispense with the Lightning connector port and the headphone port (go Bluetooth) allowing the body of the phone to be sealed and waterproof. The earliest we could see this technology would be in the iPhone seven which is expected to arrive in late 2017. In full disclose, Apple said it’s not certain the technology will be available in 2017 and is working on “overcoming the technical barriers” for implementing long distance wireless charging. Indeed seems like the stuff of Sci-Fi, but the technology already exists! Ossia’s Cota wireless charging system will charge gadgets up to thirty feet away and Qualcomm has developed a wireless charger that works with metal phones.

On a logistical note, the next Morning Energy Blog you receive will be Thursday for I will be travelling the next couple of days.