Equities and the economy

Investors and traders must have overloaded on hamburgers, hot dogs and BBQ on July 4^th because they had no appetite for risk yesterday selling equities in Europe and the U.S. breaking a 4 session rally.  The Dow fell 109 points, 0.61%, closing at 17,841, the S&P 500 500 lost 14 points, 0.68%, finishing at 2,089 and the Nasdaq fell 40 points, 0.82%, ending at 4,823.  Investors are still very nervous about Brexit and they’re shooting first (selling) and asking questions later.  Yesterday the impetus came from a report that three of the UK’s largest real estate funds had frozen almost $12 billion to stem the rush on redemptions in the wake of Brexit because they didn’t have the cash on hand to repay investors.  The Bank of England is trying to do its part to ally investor fears.  Yesterday the Bank cut its capital requirements (the ratio of loaned amount to cash in reserves) to spur lending and the Bank’s governor stated he expected the bank to ease monetary policy.

Turning to the economic news here in the States, the Commerce Department reported yesterday that factory orders fell 1.0% in May compared to April and although this was negative, it came in exactly at economists’ expectations.  For the full year manufactured goods orders were down 1.9% and orders for non-defense capital goods excluding aircraft, which is viewed by economists as a proxy for business investment plans, fell 0.4%.

Another result of Brexit is that the British Pound Sterling has made new 31 year old lows vs. the U.S. dollar.  The dollar is also stronger vs. the euro which is having its predictable effect upon commodities.

This morning the risk off mentality prevails with all the major indexes currently trading down materially between 1.51% and 1.75%.  This morning the Dow was down over 100 points but has rallied back to being down only 30.

Oil

Oil prices got whacked on the contagion from equities with WTI closing down $2.39 at $46.60 and Brent falling $2.14 settling at $47.96 and closing at a one week low.  Word out of Libya is that the state energy company National Oil Corporation agreed to merge with its rival in eastern Libya.  Both sides have realized that their fighting and destruction of each other’s oil facilities is to both of their detriment and have agreed on a truce.  There’s been so much destruction it’s going to take months to do the repair but eventually production will grow, assuming the truce holds.  Similar to stocks, WTI was down 60¢ earlier but is down now by only 11¢

Courtesy of MDA Information Systems LLC

Natural Gas

Holy Toledo!  After reaching a 13 month high recently just barely shy of $3.00 natural gas prices got obliterated yesterday with the August contract falling 22.3¢, 7.5%, closing at $2.764.  To put yesterday’s move in perspective, we haven’t seen a one day drop in prices of this magnitude since October 26, 2015 when prices fell 22.4¢.  As I mentioned yesterday, with the higher prices during bid week (the last 5 working days of the month), I believe the coal market has captured a materially greater share of the baseload market in July than in June.  When traders came in yesterday looking for a strong cash market and it didn’t materialize traders started selling futures to hedge the length they had in the physical market.  I think traders saw what happened after Memorial Day when prices ran up in June, looked at the short and long term weather forecasts which both show above normal temperatures, and knowing a lot of coal fired generation has been retired and replaced with natural gas fired generation, they all went long the physical commodity into June creating artificial demand at the end of June driving prices higher then and came in yesterday and found a market where there was a lot of “length” chasing not much demand.  Bottom line, going into July the boat was listing way too heavily to the long side.

This morning after being down about 6¢ natty has clawed back to flat to yesterday’s close.

Elsewhere

The appetite for U.S. real estate continues to flourish, and much of it is being fueled by international buyers.  Foreign buyers purchased $102.6 billion of residential property in the U.S. between April 2015 and March 2016 according to NAR and the number of properties purchased rose 2.8% to 214,885.  Chinese buyers make up the great percentage of buyers with their dollar volume exceeding the total of the next four ranked countries combined.  The explosive growth of the Chinese economy has created a very large number of wealthy people and as that country’s economy has slowed those individuals are looking for better investment alternatives.  Foreign investors look at U.S. real estate as a safe investment especially in the current volatile global environment.  Foreign buyers favorite states are Florida (22%), California (15%), Texas (10%), Arizona and New York both at 4%.