Equities and the Economy
Good morning. The horrible price action on Tuesday that I discussed in yesterday’s Morning Energy Report set the stage for a bad day on Wednesday and then when bad fundamental economic data was released yesterday investors and traders hit the “sell” button and hit it hard. Yesterday the Dow closed down 187 points (1.1%) at 17,427, the S&P 500 fell 12 (0.59%) to 2,011 and the Nasdaq lost 22 (0.48%) ending at 4,639. And as bad as that was, it could have been much, much worse for the Dow was down 300 points at one time yesterday! The lousy fundamental data came in the form of slumping commodity prices, disappointing U.S. retail sales and, as if those two weren’t enough, the World Bank cutting its 2015 global growth forecast. All commodities, especially oil, have been getting hit hard and yesterday it was the base metals (copper, iron, nickel, zinc) falling dragging even the precious metals lower with palladium, which is considered “precious” but is used extensively in “industrial” applications, i.e., catalytic converters, falling 2.5% yesterday. But the big story yesterday was the Commerce Department’s’ Retail Sales report for December showing sales fell 0.9% from November vs. the markets expectation of only a 0.1% decrease. This was the largest month-on-month decline in 11 months. Additionally, Commerce revised November’s numbers for the worse. You regular readers know the credence I put in revisions. This news sent the U.S. dollar down sharply, sent stocks down even more sharply and bond prices soaring. Yesterday’s selloff tested, but didn’t break, the S&P’s near term support of 1,992. The next two key support levels are December’s low of 1,972 and the 200 day moving average of 1,964.
This morning Dow futures are down 79 even though overnight trading in the global markets was and is higher with all the Asian stocks closing higher and the European stocks trading up. This is really disappointing. I’m not getting a warm and fussy feeling.
Oil finally found a bid of a material nature yesterday with WTI rocketing up $2.59 closing at $48.48 and Brent gaining $2.10 settling at $48.69. Brent is now trading only 21¢ over WTI. My bet is this is primarily short covering from an egregiously oversold condition. The fundamental data sure didn’t support the jump in prices for the DOE reported yesterday in their weekly crude and inventory report that on an aggregate basis inventories of crude and products rose a huge 11.485 million barrels which was way higher than market estimates and nearly double the 5 year average. Additionally, Iraq announced it plans to increase oil exports by 600,000 in February. Markets don’t go straight up or straight down (although WTI has pretty much done that since the autumn!) and the rubber band was stretched too far and yesterday happened to be the day it snapped. Now you perpetual bears may be disappointed for you’re thinking about the cost of filling your car up and the cost of energy at your facility but think about this. Falling oil prices, and commodities in general, are indicative of weak global demand, a weak global economy which is translating into lower equity prices and hitting the stock price of your company and 401K! This morning WTI is slipping being down 42¢.
After leaping 14.8¢ on Tuesday natty skyrocketed a huge 29.0¢ yesterday closing at $3.233. This means natty has rallied 15.7% in just two days! Amigos, this equates to a 2,736 point move in the Dow! Now you see why natural gas traders are huge buyers of Maalox! Natural gas is now trading at a 3 week high. I believe, similar to oil, natty was oversold driven lower by reports of strong natural gas production and the warm weather forecast last week. Then we come in this week and the weather forecast shifted colder, and shifted colder again today, and the length began adding to their position and all those shorts got dramatically squeezed.
Today is Thursday which means its EIA storage report day (9:30 CST). Expectations are for a withdrawal of 225 Bcf. Although this is nowhere near record setting it is a hefty withdrawal when you compare it to the 5 year average of 198 Bcf.
This morning natty continues to grind higher up 5.0¢
So how are lower oil prices affecting Main Street? The EIA is predicting the average U.S. household will save $750 this year on gasoline costs compared to last year. Retail gasoline prices for regular gas averaged $2.14 last week which is the lowest since May 2009. So where is this extra money going? At least some to bars and restaurants for the Commerce Department yesterday reported higher sales in that segment. Cheers!