Equities and the Economy

Good morning and happy Buffalo Soldiers Day (Bob Marley. Eh, mon). On the heels of a massive capitulation of the Chinese stock market equities around the world got crushed yesterday including, unfortunately, U.S. equities. When you woke up yesterday China’s Shanghai index had closed down a huge 8.48% (biggest one day drop since February 2007) and the negative price action in the world’s second largest economy sucked everything down with it. U.S. stocks closed lower for the 5th consecutive day yesterday with the Dow losing 128 points (0.73%), the S&P 500 off 12 (0.56%) to 2,068 and the Nasdaq was the laggard closing down 0.96%, 49 lower, at 5,040. And you should be happy about those numbers for U.S. equities outperformed all the other major global equity indexes. As I mentioned yesterday, investors are very concerned about global growth (primarily China) and very low commodities prices (indicative of low growth) and with valuations are high, such as was the S&P a couple of weeks ago, the market is vulnerable to corrections. The bull market that already rivals anything since World War II in duration is showing signs of fatigue as U.S. equities are being pushed along by the fewest stocks in more than 15 years. More than 100% of this year’s increase in the S&P 500 is attributable to two sectors, healthcare and retail. That’s the tightest clustering for an advancing year since at least 2000. The fatigue is starting to show up in the numbers. Example, the S&P has declined 4 out of the last 5 weeks and yesterday ended 3% off its May closing record high. We may not be in the technical definition of a “correction” but we are most definitely in a “pullback,” at a minimum.

Yesterday Durable Goods orders for June were released with the numbers mixed. June’s numbers came in positive but May’s were revised negatively, so we’ll call that a “push.” The Dallas Fed released its General Activity Index with the numbers coming in negative but less negative than economists were forecasting, but no doubt lower oil prices are negatively impacting the economy in the greater Texas region.

Overnight China’s Shanghai closed lower, 1.68%, but was offset by Hong Kong’s Hang Seng which closed up. In Europe all the major indexes are trading higher albeit not recouping their losses from yesterday. Here in the U.S., which you are I’m sure most concerned about, Dow futures up a measly 2 points and down form up 57 points when I began writing this blog.

Today the Fed begins its regularly scheduled two day meeting. Currently it’s a 50-50 bet the Fed will have its first interest hike this September.

Oil

The weakness in global equities over the course of the last couple of weeks has weighed heavily upon commodities. Grains have been weak. Precious and base metals have been weak (copper hit a 6 year low). The “softs (cocoa, coffee, sugar) have been weak. And energy has been weak. Yesterday WTI fell 75¢ closing at $47.39 and Brent lost more, $1.15, settling at $53.47. WTI prices have fallen 8 of the last 9 sessions with the loss over this time frame being 11% with WTI prices now at a fresh 4 moth low. Brent is at a 5 month low. Material support for WTI comes in around $45, and I’m sure that support will be tested in the near future. The bears have been firmly in control with U.S. oil production remaining “firm” in spite of a radically declining rig count, questions surrounding the growth of the Chinese economy, exports from Iraq on track for a monthly record and belief sanctions will be lifted against Iran putting more oil on an already over supplied market.

This morning WTI is slipping another 21¢ which is not bullish for we should be seeing at least a little bump in prices on the coattails of higher equities.

Courtesy of MDA Information Services LLC

Natural Gas

Natural gas was oblivious, as it should be, to the carnage surrounding it yesterday having another choppy day and then closing up 1.3¢ at $2.789. The cash market was stronger in the Northeast, supporting futures prices, with the current moderate heat wave there bringing some additional natural gas fired peaking plants into action. The heat wave will be short lived though with normal to below normal temperatures forecasted for the upper Midwest and Northeast in the 6-15 day time frame knocking off those peakers. Being the North American natural gas market is a closed system this should result in more gas going into storage. The market loves the $2.75 to $2.80 range and natty is up 3.0¢ this morning at $2.819.

Elsewhere

I came across this piece of data that I have to pass on to you. In Seattle, Washington 81.4% of kindergartners have been vaccinated for polio. According to the World Health Organization, this is lower than the 2013 immunization rates for one year olds in Zimbabwe, Sudan, Rwanda, Algeria and several other countries. Unbelievable! Absolutely unbelievable!