Equities and the economy

After coming within a whisker of posting new highs earlier in the week U.S. stock prices fell both Thursday and Friday. On Friday the Dow fell 120 points, 0.67%, finishing at 17,865, the S&P 500 lost 19, 0.92%, to 2,096 and the more volatile Nasdaq got clobbered falling 1.29%, 64 points, closing at 4,895. For the week the Dow was up 0.3%, the S&P lost 0.2%, its first weekly loss in four weeks, and the Nasdaq lost 1.0%. A number of factors weighed on the market. First, oil prices retreated. Yes, that correlation is still holding. Second, the Brexit vote. A new poll was released on Friday showing the “leave” camp rose to 55% vs. 45% who are favoring the UK to stay in the European Union. This was just one poll but all agree it’s going to be close. The vote is on the 23rd. Third, as I stated last week, record highs in any market are major resistance and it takes something positive fundamentally for new buying to come in and drive through that resistance and we didn’t have that driver last week. Investors rotated out of riskier assets, like stocks, and into bonds. And it was a major rotation! The 10 year bond yield hit 1.64% which is the lowest level in nearly three years! The benchmark German bond hit a record low of, are you ready, 0.2%! That my friends is clear evidence of investors flocking to safety focusing on preservation of capital.

The only material fundamental report on Friday was the University of Michigan’s consumer sentiment index which fell from 94.7 in May to Junes’ 94.3, but the word “fell” is a stretch. Let’s call it flat.

This morning the Dow is down marginally, 17 points, which is better than when I came into the office and Dow futures were down 76 points. And oh, gold rallied last week and is up 0.6% this morning. Gold is another safe haven.

By the way, this is going to be a big week for central banks. Our FOMC, the ECB and the Bank of Japan all meet this week.

Oil

Oil got hit both Thursday and Friday with the latter day being the worst for the bulls. WTI fell $1.49, 2.9%, closing once again below $50 at $49.07. Brent did about the same losing $1.41, 2.7%, settling at $50.54. When there’s a rush to safety the U.S. dollar usually strengthens (and the Japanese yen) and that’s what triggered the selling late last week, and not just for oil but all commodities priced in U.S. dollars. Looking at the charts the bulls have to be careful here for on Friday we broke a support line of reasonable strength dating back to April.

The higher oil prices are definitely getting the attention of oil and gas producers. For the second consecutive week the oil rig count has increased, last week by 3. Add in another +3 for natural gas and the total U.S. rig count increased by 6. Now this isn’t something to “write home to mother “ about, but it does give us a sense of where some oil and gas producers drilling in some oil plays can make some money.

This morning “the” correlation continues. When Dow futures were down 78 points WTI was trading down 67¢. The Dow is down 17 and WTI is down only 23¢.

Courtesy of MDA Information Systems LLC

Natural Gas

Natural gas prices have been screaming higher over the past couple of weeks with some profit taking coming in Friday with natty closing down 6.1¢ settling at $2.556. A combination of lower production, higher fundamental demand and a warmer forecast has driven prices to 9 month highs. In the past month front month natural gas prices have rallied more than $1.00. This morning the July contract is up 6.5¢. Why? Just look at the enclosed weather forecast. The 11-15 day forecast has the entire country warm with above normal temperatures everywhere. That’ll bring in buyers every time.

Elsewhere

The coal companies are definitely not having good times. The EIA just noted that for Q1 2016 coal production was 173 million short tons, the lowest quarterly level since in the U.S. since a major coal strike in Q2 1981, 35 years. Coal production decreased 17% from Q4 2015 to Q1 2016 which was the largest quarter-over-quarter declines since Q4 1984. Coal rail carloads for Q1 2016 were about 20% lower than Q1 2015. Electricity generation accounts for more than 90% of domestic coal use and the combination of low natural gas prices, EPA requirements, the retirement of coal fired electric generation plants and more renewable sourced generation has hammered the coal industry.