Equities and the Economy
The penultimate of the ECB meeting was a fairly quiet one for U.S. stocks with the oil/equity relationship remaining intact. Oil prices recovered and stock prices ended higher. The Dow closed up 36 points right at 17,000, the S&P 500 added 10 to 1,989 and the Nasdaq finished 26 points higher at 4,674. There were no economic reports of significance so let’s move on to this morning because that’s where the action is. The ECB has concluded its meeting today and President Draghi has had his press conference. Setting the stage, the market was expecting a 10 basis point rate cut from the current 0.05% rate and an increase of Euro 10 – 20 billion in the ECB’s bond buying QE program. The soothsayers were right on, but got even more. The ECB did cut it’s deposit facility rate 10 basis points from minus 0.3% to minus 0.4% (more negative interest rates!) and increased it bond buying by Euro 20 billion (the high end of estimates) to euro 80 billion beginning in April, but the bank also cut its key lending rate, known as the refi rate, to zero from 0.5%. On the news European stocks are skyrocketing with Germany’s DAX and France’s CAC 40 up 2.47% and 2.75%, respectively. U.S. equities are riding Europe’s coattails with the Dow up 87 which is off from earlier when futures were up 146 points. Hopefully we’ll keep these gains to the closing bell and close above the 2,008ish level basis the S&P.
Think about this. There are four major global central banks: the Fed, the ECB, the Bank of Japan and the Peoples Bank of China. The latter three keep pumping in more and more QE manipulating it’s monetary policy to make its currency cheaper to capture the other’s market share of global demand. I used to say it was a “race to zero.” Now the question is how far negative these banks will take interest rates.
Yesterday was the seven year anniversary of our current bull market. At 85 months it is the second longest bull market since WWII, only behind the 115 month bull market from October 1990 to March 2000. It has returned 190% to investors over that time frame but it’s been the most hated bull market in history. Why? Because the surge in equities has been accompanied, possibly accomplished, by an unprecedented amount of financial engineering by central banks. Per Bank of America Merrill Lynch, during this bull run there have been 619 global interest rate cuts, $10.4 trillion worth of asset purchases by central banks and $9 trillion worth of global government debt (about 25% of all government debt in the world) yielding zero percent or less. The contribution to the rally from financial engineering has dominated any signs of broad demand or profit growth.
Yesterday oil prices got a boost from the weekly DOE report. While crude inventories came in right at expectations with a 3.9 million barrel increase, gasoline inventories fell way more than expected. The market was looking for a 0.7 million barrel fall. The actual number was a huge decline of 4.5 million barrels. WTI closed $1.79 higher, 4.9%, at $38.29 and Brent settled up $1.52, 3.6%, at $41.07. For the record, U.S. crude inventories are currently at 522 million barrels, a new record. Inventories are at record a record level but the contango in the price curve continues to narrow with the WTI/Brent average year spread decreasing from $8.66 a month ago to $5.12 currently. This tells me that on a global basis crude oil is much less aggressively bidding for storage. WTI is not getting any love from the ECB’s increased stimulus announcement being down 63¢ this morning.
Natural gas prices chalked up another day of gains finishing 4.0¢ higher at $1.752. This market has had a bid bias this whole week and the back end of the curve is strong. Calendar 2017 and 2018 are up 10-15¢ since February 25th. One may point to the weather forecast which turned cooler this week in the 11-15 day time frame, but I don’t buy it. I believe traders (of which I was one for 25 years) have put winter behind them and are looking to summer, rig counts and production levels. No official summer forecast has been released but there’s rumblings that summer forecasts are indicating above normal temperatures which I’m sure is bringing in buyers.
Today is Thursday and we all know what that means: EIA storage report day. The market is looking for a withdrawal of 62 Bcf. We’ll know at 9:30 CST. Natty is up 4.2¢ this morning.
It’s a sad day in pop culture. Dos Equis announced it will retire its long-running “The Most Interesting Man in the World” campaign. The popular ad series starring character actor Jonathan Goldsmith has been on the air since 2006 and the beer company feels it’s time to move on. Since the campaign began Dos Equis sales has nearly tripled with annual sales reaching $325.3 million last year. The Most Interesting Man will of course be sent off in style. A new ad will feature him being dispatched on a one-way mission to Mars with characters from past ads bidding him farewell. Here are a few lines from past Dos Equis’ commercials describing The Most Interesting Man in the World.
If he were to pat you on your back you would list it on your resume.
When in Rome, they do as he does.
If opportunity knocks and he’s not home, opportunity waits.
His only regret is not knowing what regret feels like.
Sharks have a week dedicated to him.
In museums he’s allowed to touch the art.
He once ran a marathon because it was on his way.
The last time he flirted with danger, danger got clingy.
He once gave a pep talk so compelling both teams won.
He lives vicariously through himself.