Equities and the Economy

Good morning. After six sessions of negative news, for that is how long this losing streak has lasted, I finally get to relay (and I bet you already know what I’m going to say!) U.S. equities had a good day. No, they had a great day! In fact, on a percentage basis the Dow and S&P 500 posted their biggest gains in four years. Booyah! The Dow jumped a whopping 619 points, 3.95%, closing at 16,285, the S&P 500 popped 73 points, 3.90%, ending at 1,941 and the Nasdaq gained a big 4.24% closing up 191 points at 4,698. The market was pushed higher on a combination of both fundamental and headline news. Fundamentally, the Commerce Department reported that durable goods orders rose a surprisingly robust 2% in July with economists forecasting a 0.4% decline. Drilling down into the report core capital goods, or non-defense capital goods orders excluding aircraft and a category often seen as a barometer of business investment, rose 2.2% and quite higher than the 0.3% forecast. So indeed, this was a very good report. The headlines came from Mr. William Dudley, the President of the New York Federal Reserve Bank, which by the way is a permanent voter on the FOMC, stating that the recent chaos in the capital markets made an interest rate hike in September “less compelling.” Now Mr. Dudley is considered a “dove” when it comes to monetary policy meaning he leans more toward an accommodating policy than away from it, but being he’s a voting member his comments do carry weight.

Now I don’t want you to call me Debbie Downer but I’ve got to let you know, from a technical perspective resistance is in the 1987 to 2016 level basis the S&P. I know this is wide range but considering the range from the recent high and low is a big 241 points it makes the range of resistance wide. So we need to get through these levels before, in my opinion, we’re out of the woods where the bear has been roaming.

Overnight the Asian markets came roaring back with China’s Shanghai closing up 5.34% but it wasn’t on a slam dunk. Less than an hour before the close the index was trading in the red. The European markets are currently trading in the green as well. This is all well and good but this is really not giving me direction for they are really just playing catch-up following yesterday positive price action in U.S. equities. The focus is on U.S. stocks and I’m please to tell you Dow futures are currently up a very nice 151 points but this is down from 193 points earlier this morning. Let’s see how the markets close for as I’ve said many times, closes are much more important than opens.

Oil

Equities may have shot up yesterday but oil prices didn’t get any love from it with WTI falling 71¢ closing at $38.60 and Brent losing 7¢ settling at $43.14. WTI prices appear to be stabilizing near 6 ½ year lows and are down nearly 40% form their 2015 highs reached last spring. Fears of a global supply glut due to a slowing Chinese economy, a possible increase in Iranian exports, close to record output from OPEC and persistently strong U.S. production despite a 60% drop in the rig count are keeping a lid on prices.

The DOE released its crude and product report yesterday showing crude inventories dropped a huge 5.45 million barrels which was much larger than expectations of a 2.1 million barrel decline. This was offset somewhat by a build in gasoline stocks which rose 1.66 million barrels and much greater than the 0.2 million barrel forecast. In aggregate (the most important number), inventories fell 2.39 million barrels which was considerably more than estimates of 0.7 million barrels. Bottom line, the DOE report was bullish but the price action was not.

Maybe we can call it a delayed reaction or possibly the combination of stronger equities this morning and yesterday’s bullish DOE report but WTI is up a material $1.81.

Courtesy of MDA Information Systems LLC

Natural Gas

The front month natural gas contract saw virtually no movement in price yesterday with the September contract closing up 0.8¢ at $2.693. However, I did see some strength in the back months with the calendar 2016 strip closing up 1.5¢ at $2.955. Let’s move along for today is an exciting day for natty. First, it’s Thursday which means we have the regularly scheduled EIA natural gas storage report at 9:30 CDT. The forecast is for a 62 Bcf injection which is between last year’s 77 Bcf injection and the 5 year average of 61 Bcf. We also have today the expiration of the September Nymex contract which sets many natural gas and electricity supply agreements along with a plethora of derivative products. The weather forecast is pretty much a repeat of yesterday’s continuing to show above normal temperatures in the eastern half of the country. Now this will elevate A/C loads marginally but this forecast is for early September when CDD’s are normally decreasing. I’m really curious to see if these above normal forecasts are the beginning of the El Nino effect. Only time will tell.

Elsewhere

The EIA came out this week for the first time reporting a decrease in natural gas production in all the seven major shale plays beginning next month. Production from these basins reached a high in May of 45.6 Bcf/d and is expected to fall to 44.9 Bcf/d in September. In each region production form new wells I not enough to offset production declines form existing, legacy wells. The 60% rig count decline is finally beginning to have an impact on natural gas as well as crude production.

Have a nice day.