Equities and the Economy

If you were an equity day trader yesterday it was a chop fest and most probably you lost money. After opening lower and being down as much as 127 points around noon eastern, stocks found some buyers, moved higher all afternoon and closed at their highest levels of the day. The Dow rose 78 points, 0.4%, to 17,919, the S&P 500 added 11, 0.5%, to 2,100 and the Nasdaq gained 36 points, 0.8%, finishing at 4,859. Bond prices, which usually move opposite of stocks, actually inched higher with yields slightly falling as investors continue to seek safety following Britain’s vote to leave the EU. With respect to the EU, Italy is once again “stirring the pot” with the focus on the banking sector. Overall, banking stocks in the EU have just been getting pounded this year with the STOXX 600 Banks Index down over 53% form 2015 highs. However, Italian banks are in worse shape than the average with their balance sheets fraught with non-performing loans. Reports are that 17% of Italian bank loans are non-performing. Putting this in perspective, at the depths of the Great Recession here in the U.S. 5% of loans were non-performing. Now here’s where things could get sticky. Italy is proposing to bail out its banks. Now this wouldn’t be such a big deal except for the fact that is in direct violation of the agreement it made when it joined the EU. This could be “saber rattling” to get a bail out from the ECB or IMF but keep an eye on this because this spells fragility for the EU more so than the eventual British exit from the EU ever could.

Turning to the fundamental economic data, the Institute of Supply Management reported that its index of service sector activity rose from 53 in May to 57 in June and most importantly, far better than Wall Street was forecasting. A very good number folks.

Yesterday the FOMC released the minutes of its June meeting with the speculation by investors going into the meeting that the Fed would wait to see the results and impact of the Brexit vote before raising interest rates confirmed.

Today and tomorrow two very important reports will be released. Today ADP releases it private payroll report for June which is viewed as insight into tomorrow’s always big Labor Department Employment Situation report. I expect a big revision to the latter’s May jobs data. If you recall, the Labor Department reported 38,000 jobs created. The market thought it was a typo looking for a 1 in front of that number.

By the way, gold finished yesterday at its highest level since March 2014.

In what’s an anomaly of late, this morning is beginning quietly with the Dow up 56 points. European stocks are finally finding a bid after days of getting pummeled with the indexes there up 0.71% to 1.36%.

Oil

Oil followed equities price action yesterday opening lower and closing higher. WTI rose 83¢ closing at $47.43 and Brent gained a penny more settling at $48.80. Oil prices have been facing a strong headwind in the form of a stronger U.S. dollar as investors seek safe harbors. The dollar has gained materially vs. the euro and a stunning 13% vs. the British pound since the Brexit vote.

This morning WTI is up 57¢ on the heels of API’s crude and products report last evening which surprised everyone. Their report showed crude investors fell a whopping 6.7 million barrels with an aggregated drop, which includes gasoline and products, of a massive 12.6 million barrels. The bears will say “A 12.5 million barrel drop and we’re only up 57¢?!” They have a point. Today we’ll see if the API’s number is credible with the DOE’s report which comes out at 9:30 CDT.

Courtesy of MDA Information Systems LLC

Natural Gas

Natural gas prices started out weaker on continued selling pressure from Tuesday when the August contract fell over 22¢, however, in mid-morning buyers stepped in erasing the losses with the cash market holding and finished up 2.2¢ at $2.786. The market is balancing lower production, ~2 Bcf/d, and an above average temperature forecast vs. storage levels at their highest level ever for this time of year as a result of the extremely warm winter. Speaking of storage, it’s EIA storage report day with traders looking for a 41 Bcf injection which if materializes would continue the trend this summer of markedly lower than historical average injections. This morning natty is up 2.8¢

Elsewhere

JPMorgan Chase conducted a study of one million Chase customers across 23 states on what consumers are doing with the money they saved last year from the lower gasoline prices. On average, gas prices in the U.S. were 25% lower in 2015 than 2014 which generated a potential savings of ~$630 per household. Households spent 58% of the their total potential gas savings. Of that amount, households spent 24%, about $150, at gas stations. The spent 34%, about $200, on things others than gas, primarily at restaurants and retail. The remaining 42% was either saved or spent on purchases not typically paid for using debit or credit card, notably durables or vehicles.