Equities and the economy

The last Blog was last Tuesday morning but there’s no reason to comment about Wednesday’s or Thursday’s market action for all that mattered was what happened Friday and I’m sure you know by now stocks around the globe plunged on the surprising results that British voters chose to leave the European Union. The numbers were: Dow down 620 points, 3.39%, to 17,400, the S&P 500 off 76 points, 3.59%, to 2,037 and the Nasdaq the laggard closing down 4.12% at 4,708. The Dow’s move was its 8th largest daily loss ever having its worst day since August 2015. The Nasdaq had its worst day since August 2011. The Dow and S&P are now back negative for the year. Financial and insurance stocks got hit the worst with the group falling 5.4%. The volume traded on Friday was the highest of the year. These moves were exacerbated because the market was pricing in for the “Remains” to win the referendum and before the vote was known the major stock indexes were pricing in a 2% gain for the week. Be glad you don’t own the Nikkei index. It fell a huge 7.3% on Friday which is its biggest decline since the aftermath of the 2011 earthquake.

Gold benefited from the risk-off move jumping a big 4.7% as bid the U.S. dollar with the pound sterling falling more than 10% vs. the dollar and trading at its lowest level since 1985.

So investors had the weekend to think about all this and let’s what’s going on around the world this morning. Well one thing I can tell you is the panic is over. Asian stocks closed mixed with Japan’s Nikkei capturing back 2.39% of its loss on Friday. However, the bears are still in charge in Europe and the U.S. The major indexes in Europe are down 1.90% to 2.16% but we’re faring a bit better in the U.S. with the Dow down 0.83%, 144 points. As I always say, the closes are more important than the opens and let’s see if we can close in the green.

The good news folks is this is not a liquidity crisis which was the case when Lehman Brothers collapsed. Additionally, the UK is not leaving tomorrow. This is a two year process.

Oil

It is no surprise that oil prices got bludgeoned on Friday as did almost every commodity with traders selling everything considered risky and that would include oil. WTI fell $2.47, 4.9%, closing at $47.64 and Brent lost $2.50, also 4.9%, settling at $48.41. Traders are currently trying to assess the impact on oil demand resulting from Brexit. Goldman Sachs just released a report stating that at 2% drop in UK GDP, which is huge, would result in only a 0.016% decline in global oil demand. Maybe more importantly is Morgan Stanley’s report this morning to its clients cautioning against its negative outlook for the Chinese economy.

On Friday Baker Hughes reported that 7 less rigs were looking for oil which almost completely offsets the 9 increase the week before. That being said, it appears that in the $47 to $50 price range, basis WTI, the rig count is stabilizing.

This morning WTI is down $1.05 which should be of no surprise considering the what’s happening in equities. It’s not a matter of price direction, only magnitude.

Courtesy of MDA Information Systems LLC

Natural Gas

Natural gas prices retreated but only by a bit on Friday closing down 3.6¢ at $2.662. Natty prices have rallied nearly $1.20 over the past 4 months to a 10 month high of just below $1.80 last week. The elevated levels of natural gas consumption in the electric generation sector (record levels) is buoying prices in addition to production having fallen by about 2 Bcf/d. At the current higher natural gas prices coal is beginning to capture back some market share. Coal consumption by power generators last week at the national level increased to above 16.5 short tons for the first time since January. Here in ERCOT coal consumption hit a 2016 high at 2.5 million short tons during the first week of June.

Equities and oil may be getting hit this morning but natty prices are up 4.8¢. Like last week the cash market is strong and that’ll support futures prices every time.

Elsewhere

Over the weekend the new and improved Panama Canal Expansion opened with the first Post-Panamax vessel passing from the Pacific Ocean to the Atlantic Ocean. A Post-Panamax vessel is the new, super large ship which carries 13,000 to 14,000 TEU’s (twenty foot equivalent container). Previously, the largest vessel that could pass through the canal carried 5,000 TEU’s. The nine year $5.4 billion project, also called the Third Set of Locks Project, doubled the shipping capacity of the canal. The expansion of the Panama Canal makes it more competitive with the Suez Canal in Egypt shortening the one-way journey from Asia to the U.S. East Coast by roughly 5 days and eliminating the need for a trip around South America’s Cape Horn. It’s expected to shift about 10% of the Asia-to-U.S. container traffic from West Coast ports to East Coast terminals by 2020. So far, 136 ships that previously could not fit through the canal; have made reservations for transit.

Panama is not the only country investing in the canal. The U.S. is as well with approximately $155 billion expected to be spent by 2020 in expanding Gulf and East Coast ports including dredging, raising crane heights and in the case of ports of New York and New Jersey, raising the Bayonne Bridge by more than 60 feet at a cost of $1.3 billion. The Expansion was a must if the Panama Canal was to continue to play its key role in global trade. In the shipping industry, supply currently exceeds demand by a whopping 30% and freight rates barely cover fuel costs. In the move to bigger and more efficient ships, many of the smaller ships that were tailor-made for the old Panama Canal are expected to soon be obsolete. The Canal had to expand to expedite trade to the U.S. East Coast, to lesson cost for shippers and take pressure off West Coast ports.