Equities and the Economy
It wasn’t much, but it was enough to sustain the rally for a 5th consecutive session, at least for the Dow and S&P 500. The Dow gained 67 points closing at 17,074 and the S&P added 2 to 2,002 (note that recently we’ve been bumping up at the 2,000 resistance level). The Nasdaq though fell 9 points to 4,708. The former two indexes were boosted by large gains in the energy and material sector. The three week long advance we’ve had has taken us to two month highs and largely driven by higher oil prices which gained 10% last week. The S&P is now only down 2.1% for the year. It was down 10% at its low last month. The Nasdaq was hit with the FANG stocks (Facebook, Apple, Netflix and Google) getting hit pretty hard yesterday with losses between 1.11% and 6.0%. Keep in mind the FANG stocks performed exceptionally well in 2015 posting outsized returns.
There were no economic reports of significance released yesterday. Let’s talk about commodities for investors closely watch the commodities market as an indication of global growth. In Q4 and into February commodity prices were getting hammered with many, including copper and oil, hitting multi-decade low prices. Well many of them have bounced back hard. You know about oil because I discuss it every day, but others have as well. Iron ore and steel prices have skyrocketed with iron ore prices up 36% since late December. Other primary metals are also materially higher but not by this amount. This is another example of the risk on” mentality currently in the market. What’s strange is that the risk off play, gold, is up over 19% year-to-date far outpacing almost anything other than the most volatile and uncommonly strong small-cap stock on the NYSE, Nasdaq or Russell.
This morning Dow futures are down 88 points with the Asian markets closing mixed and the European markets currently trading in the red, but the moves are muted. Data out of China overnight shows the Chinese government has their hands full transforming the economy there from export driven to consumption driven. In February Chinese exports fell 25.4% y-o-y, the steepest decline since May 2009, and imports slid 13.8% from a year earlier. Now in full disclosure the trade figures may be distorted owing to the week-long Lunar New Year holidays, but it does highlight the major headwinds facing the country, and by extension, the global economy.
The big event this week will be the ECB’s meeting on Thursday with expectations the central bank will cut the bank’s deposit facility rate by 100 basis points. That’s QE folks. Talking about yields, or lack thereof, The Bank of Japan auctioned off it’s 10 year note yesterday and demand was so strong the yield hit a new low, -0.101%. Yes, negative. People are paying to lend money to, or park it, at the central bank. Incredible! Please pay me to hold your money.
Oil prices hit a 3 month high with WTI gaining $1.98, 5.5%, closing at $37.90 and Brent adding $2.12, also 5.5%, settling at $40.84. Fundamentally the slick stuff got support from the EIA which said in its drilling productivity report that U.S. shale oil production is expected to experience its second largest decline ever in April. It’s taken more time than they thought but it looks like the Saudi’s strategy initiated 16 months ago of hitting the U.S. shale producer is starting to come to fruition. In general, shale oil is the most expensive oil to produce.
WTI is slipping marginally this morning being down 34¢ on a couple of news items. First, Goldman Sachs is pouring cold water on the commodities rally, including oil, saying the recent surge in commodity prices was premature and unsustainable (Goldman must be either short or missed this run up. Lol!). Second, Kuwait’s oil minister said today that the only way Kuwait would join the oil production freeze is if every OPEC country participated, including Iran. Otherwise, he said Kuwait would “go full power if there’s no agreement.” Kuwait currently produce 3 million bpd.
Natural gas prices posted a gain of 2.4¢ yesterday closing at $1.690. After having posted a 56¢ decline, 25%, to a 17 year low over the past month, short covering has rallied natty 13¢ from its recent low. With the mild weather over the weekend cash gas at Henry Hub traded $1.49, its lowest level since 1998. The weather forecast is little changed from yesterday with widespread much above temperatures over the next couple weeks for the eastern 2/3rds of the nation. For the next 3 days Cincinnati will be 24 degrees above normal and in the 70’s and Philadelphia will be about the same posting highs in the upper 70’s. That’s summer temps folks!
The FERC late last week authorized Cheniere Energy to begin commissioning its Sabine Pass LNG Train 2. The authorization allows the plant to introduce fuel into Train 2 for its expected service date in August of this year. Train 2 is expected to have 0.6 Bcf/d of natural gas demand.
This morning natty is flat to yesterday’s close being down 0.4¢. Total chatter.
I bet you have never heard the name Ziryab. Ziryab lived from 789 to 857 AD, and changed society. He was a Persian polymath: a poet, musician, singer, cosmetologists, fashion designer, celebrity, trendsetter, strategist, astronomer, botanist and geographer. At least two of his innovations remain to this day. He introduced the idea of a three course meal (soup, main course, pudding) and the use of crustal for drinking glasses (previously metal was the primary material). He introduced asparagus and other vegetables into society and made significant changes to the music world including adding a 5th pair of strings to the Oud and laying the early groundwork for classic Spanish music. He had numerous children, all of whom became musicians, and spread his legacy throughout Europe. The list of societal changes he made is immense. He popularized short hair and shaving for men and started a vogue by wearing different clothes based on the seasons. He created a pleasant tasting toothpaste which helped personal hygiene (and longevity) in the region, and also invented an underarm deodorant. He also promoted bathing twice a day. Pretty impressive set of accomplishments, eh? Especially when you consider he was a slave! Due to his talents and skills Ziryab eventually gained his freedom and travelled throughout the Middle East spreading his cultural revolution.