Equities and the economy

Ever since seeing new record highs in their sights last week the major indexes have been on been on the defensive. Yesterday U.S. equities closed lower for the third consecutive day with the Dow falling 133 points, 0.74%, to 17,732, the S&P 500 lost 17 points, 0.81%, finishing at 2,079 and the Nasdaq ended 4,848, down 46 points, 0.94%. There’s clearly a risk-off rotation going on in the market right now with investors selling riskier assets like stocks and buying safe haven products such as U.S. Treasuries and German bonds. Evidence: the 10 year Treasury yield has hit new 2012 lows and the German 10 year bund (that’s what the German government bond is called) traded below 0.0%, the first time in history. Investors not only have the FOMC meeting today and tomorrow to think about but also the Bank of England and Bank of Japan meetings at the end of the week. However, the largest concern of particularly European investors is the Brexit vote on June 23rd on whether or not Great Britain will leave the European Union. Polls are showing the vote is currently too close to call but the consternation is why German bunds (most definitely a safe haven) are being strongly bid up (with the consequence being the yield is falling). And oh, gold is trading at a 5 week high.

At least one of the major credit rating agencies, Fitch, has concerns about Japan’s economy. So much so, they lowered the nation’s sovereign debt outlook to negative from stable citing a lack of steps to achieve fiscal reform. Japan’s debt is rated “A” which is 5 levels below the top “AAA.” Fitch did add the caveat that a downgrade could be avoided if measures were taken to meet fiscal discipline targets. Remember, when a credit rating is lowered it costs more to borrow in the form of a higher interest rates which is to offset the higher risk associated with the lower credit rating. Japanese shares are trading at 2 month lows.

Regarding the FOMC meeting, Dr. Yellen will hold an press conference tomorrow after the conclusion of the meeting. The market believes the Fed doves will prevail and there will not be a hike in interest rates. The horrible May jobs report released earlier this month and the Brexit vote next week will mostly like be the justification for not raising rates.

By the way, did you have the professional social networking site LinkedIn in your stock portfolio? Sadly, I do not for if I did my position would be worth a whopping 47% more today! Microsoft announced it was buying the company. As the Aussies say “Good on ya” if you owned it.

The selling continues this morning with the Dow down 81 points. Let’s see how it closes.

Oil

In sympathy to equities, oil prices have been declining the last 3 days after hitting an 11 month high last week. Yesterday WTI closed down 19¢ at $48.88 and Brent lost the same settling at $50.35. Of note, the weaker U.S. dollar is not even helping the bulls. The dollar hit a 5 week low vs. the yen yesterday. Now the euro is more important than the yen when it comes to currency relationships for commodities but the fact the yen is so strong and oil prices are falling is not bullish of oil.

The IEA put out a couple of reports yesterday, one favoring the bears and one favoring the bulls. The bearish news was that the agency forecasted that Iranian crude oil production in 2016 will increase by 700,000 bpd y-o-y to average 3.6 million bpd. Remember, Iran has stated they will not even discuss production limits until the country reaches the presanction production level of 4.0 million bpd. On the bullish side the agency stated they revised their global demand forecast upward for 2016 led by the emerging markets in India and China. They also added they expect global supply and demand to balance in the second half of 2016.

WTI is trading down 51¢ this morning.

Courtesy of MDA Information Systems LLC

Natural Gas

Natural gas prices have maintained their strength trading near 9 month highs. Yesterday natty added 2.9¢ closing at $2.585. The weather forecast continues to be supportive of prices with above normal weather forecast for most of the country for the next 2 weeks (at least the part of the country that really affects natural gas Nymex prices). The power sector continues to be on a terror sucking up natty at record levels. Add in lower production levels and you see why prices are not climbing. And the extended forecast is for above normal temps for the next couple of months in the Midwest and east. This morning prices are flat to yesterday’s close being up 0.3¢. Chatter.

Elsewhere

I’ve previously told you of nuclear plants closing. For example, Vermont’s Yankee plant closed in December 2014. Additionally operators of other plants are threatening to shut down their reactors. Exelon has twice proposed to close the Quad Cities plant in Illinois. Well it’s not all gloom and doom in the nuclear industry. The Tennessee Valley Authority on June 3rd connected it’s Watts Bar 2 nuclear plant to the grid becoming the first nuclear reactor to come on line since 1996 when its Watts Bar 1 began operations. Watts Bar 2 is currently undergoing final testing and is expected to start commercial operations later this summer. The new reactor is designed to add 1,150 MWs of capacity to southeastern Tennessee.

The plant is a long time in coming. Construction began way back in 1973 but was halted in 1985 after the NRC identified weaknesses in TVA’s nuclear program. TVA made the necessary changes and construction resumed in October 2007. These things aren’t cheap to build. The initial cost estimate was $1.7 billion. The final cost, $4.7 billion. Yikes!