Equities and the Economy
Good morning. As I’m sure you are fully aware, the U.S. markets were closed yesterday for the holiday so let’s review happened Friday and last week. In summary it was a roller-coaster week. On Friday the Dow shot up 191 points to 17,512, the S&P 500 climbed 27 to 2,019 and the Nasdaq popped 64 to 4,634. However, Friday’s gain could not pull the week into the black with the Dow, S&P and Nasdaq all ending down 1.3%, 1.2% and 1.4%, respectively. Last week, equity markets, especially European stocks, were rocked by the Swiss National Bank’s move to lift its currency ceiling as well as volatile oil prices and fears of global deflation. There was some important economic data released Friday which you may have missed. U.S. consumer prices fell 0.4% in December, the largest drop since the end of 2008, driven lower by tumbling energy prices. That being said, core inflation that strips out food and energy, was unchanged somewhat disappointing analysts. Industrial production declined 0.1% in December marking the first drop since August. The unusually warm weather in December quelled heating demand which was the culprit for the drop. In another report, and a very positive one, consumer sentiment hit its highest level in 11 years in January.
So the U.S. markets have been closed for three days and let’s see how this morning is taking shape. Decently with Dow futures up 44 points, although futures were up 88 when I came in. There’s no doubt what’s supporting U.S. stocks this morning: the Asian and European markets. The Asian markets closed strong with Japan’s Nikkei 225 and China’s Shanghai up 2.07% and 1.82%, respectively, and the European markets are currently all trading nicely higher. Regarding the latter, all the talk recently has been about the ECB and its QE and stocks in Europe have been rising lately because of it. I feel the ECB’s QE is getting “built in” and I hope Mr. Draghi and his friends don’t disappoint. This may be a classic case of “buy the rumor, sell the fact.”
I’ve discussed many times the disaster that’s unfolding in Russia by the combination of falling oil prices and sanctions which is reflected in the plummeting of the Russian ruble. Well at least one company has faith. Schlumberger announced today they are buying a 45.6% share of Eurasia Drilling Co., Ltd which is the largest provider of onshore drilling services in Russia. It also provides offshore services in the Caspian Sea and works in Iraq. The deal also gives Schlumberger the right to purchase the rest of the company at a later date. Last week Schlumberger announced they would be cutting 9,000 jobs in 2015 but they still employ around 120,000.
Last Friday oil got a big pop with WTI closing up $2.44 at $48.69 and Brent adding $1.90 settling at $50.17. I was following the markets yesterday and oil took a hit after the International Monetary Fund released its latest forecast for global growth lowering it to 3.5% from 3.7%. It doesn’t take a PhD in economics to conclude this is bad for oil demand, and therefore prices. Additionally, China’s Premier Li Keqiang stated yesterday that the country, and the world’s biggest energy consumer, faces significant downward pressure on its economy in 2015. This is a day after China reported growth of “only” 7.4% in 2014, the lowest in 24 years. On top of those two headlines the Deputy Minister of Iraq reported yesterday the country pumped a record 4 million bpd in December. Death by a thousand cuts for the oil bull. All that bearish data is weighing on WTI this morning with it being down 89¢. Bye-bye Bakken shale production
Natural gas slipped 3.1¢ on Friday to $3.127. Setting the scene for you, the weather forecast Friday morning was showing pretty much normal weather in the 6-10 day time frame and an arctic blast in the 11-15 day period with temperatures an average of 5 – 8 degrees below normal. Well that has all changed this morning. Quoting our private forecasting service, MDA, the 6-10 has moved to a “considerably warmer outlook” with the 11-15 shifting marginally warmer but still pretty cold in the mid-Atlantic and New England regions. So how is the market interpreting this change in forecast? By absolutely destroying natty. The front month February contract is down 21.8¢ as I write trading at $2.909. Now let’s keep in mind that last week we were at a 3 week high and even with today’s price drop we’re still trading higher than the recent low of $2.805. Winter ain’t over yet, but the bulls really need help. Coal?
Have a good day.