Equities and the Economy

Good morning and happy National Devil’s Food Cake Day. The Dow and S&P 500 marched to another record high yesterday fed by fruit. The fruit was Apple which rose 1.1% and was the biggest factor for the rise of the three major indexes. The numbers were: Dow closed up 26 points to 18,399 beating its previous record from March 2nd. The S&P racked up its 3rd consecutive all-time high close gaining 6 to 2,129 and is up 3.4% this year. The Nasdaq added 30 points to 5,078. It’s always feels strange for me to say this but once again it’s the economic data recently of slowing economic expansion, stemming partly from a stronger dollar and sluggish wage growth, leading investors to push back expectations of a Fed rate hike. Yesterday a report from the National Association of Home Builders came out a tad disappointing showing U.S. homebuilder sentiment fell from 57 to 56 in May although most builders view market conditions as favorable. The most important thing is the index stays over 50.

I think analysts at Bank of America Merrill Lynch summed it up in their recent note to investors saying “that until U.S. macro [data are] unambiguously robust enough to allow the Fed to hike safely, we think investors will be cursed by mediocre returns, volatile trading rotation and flash crashes.”

This morning the Asian markets are all nicely in the green with China’s Shanghai closing up a huge 3.13% which equates to an enormous 576 Dow points. If that happened to U.S. equities it’d be on every radio and television station all day. This was the Shanghai’s highest settlement in two weeks on the heels of the government there announcing more economic reforms including further opening of the capital markets. The European markets are rallying on comments from a couple of ECB officials that QE is “full steam ahead.” European and U.K. equities have been pushed to record highs this year fueled by the 1.1 trillion euro ECB bond buying program launched in March. If there’s one thing we all had better learned the last 6 years is that equities love QE. I don’t care what country of the world it is.

The global good news is somewhat spreading to the U.S. with Dow futures up 19 this morning. By the way, also helping both European and U.S. equities are German bond yields that are continuing to back off their highs last week which sent equity markets tumbling in both in Europe and the U.S.

Oil

Oil prices were fairly sedate yesterday with WTI closing down 26¢ at $59.43 and Brent off 54¢ settling at $66.27. Being there was no material fundamental news affecting the oil markets yesterday we can point to the U.S. dollar which, after having strengthened materially over the last 4 weeks vs. the euro, got destroyed yesterday and we all know that puts downward price pressure on commodities priced in U.S. dollars. Yesterday it was the aforementioned comments from the ECB officials strongly supporting QE efforts there which crushed the dollar. With reference to the strengthening euro recently, it was much less about stronger economic fundamentals on the Continent and much more that the euro was egregiously over sold and the heavily listing boat required rightening.

This morning WTI is down $1.12 on two factors. First, I believe some profit taking is coming in being that WTI has been on a steady rally with few pull backs since hitting its low back in March. The rally was assisted by the weakening dollar over the last month. And I think the U.S. dollar strengthening which is continuing today is the catalyst for the profit taking/selling of WTI.

Courtesy of MDA information Systems LLC

Natural Gas

Natural gas did absolutely nothing across the entire price curve yesterday with June’s price down 0.6¢ at $3.010. This morning natty continues to climb trading up 8.3¢ as I write driven by a weather forecast which beginning Memorial Day and continuing for 10 days shows some above normal temperatures in the east. Front month natty prices have risen more than 65¢ (27%) in a little more than 3 weeks and are trading at a 4 month high. Now if this was March or April the above normal temperatures wouldn’t be a big deal and although it’s not July or August it does mean higher than normal CDD which means more air conditioners kicking on which means more natural gas burns, especially with 3 nukes down in the northeast. Now the yang to the ying of this is there is now doubt that there will be less coal to gas switching with natty above $3.00 than there was at $2.50. Bid week is next week which is when the physical buyers and sellers come out and the June Nymex contract expires next Wednesday so next week is when we’ll see how this all shakes out.

Elsewhere

You probably didn’t catch this but George W. Bush gave the commencement speech to graduates at Southern Methodist University (SMU) last weekend. You got to love one of this statements. “To those of you who are graduating this afternoon with high honors, awards and distinctions, I say ‘Well done.’ And, as I Iike to tell the C students: You, too, can be president.” Too funny!  Have a good day.