Equities and the economy

It was not a good day for U.S. stocks yesterday with the major indexes falling to three week lows. The Dow fell 140 points, 0.8%, to 17,751, the S&P 500 lost 18, 0.9%, to 2,063 and the Nasdaq closed down 54 points, 1.1%, at 4,763 with the latter having only one day up in the last eight sessions. It could have been worse for the Dow was down over 200 points at one point yesterday. Folks are pointing to the China’s Caixin manufacturing PMI which remained in contraction for the 14th consecutive month with the index coming in weaker than expectations at 49.4 in April compared to March’s 49.7. The accompanying press report noted that “overall employment declined again, with the rate of job shedding only fractionally slower than February’s post-global financial crisis record.” Now this is not to be completely unexpected with the Chinese government making it well know they want to shift the economy there from manufacturing to one that is more services driven (which have been growing) with more internally driven demand. My take on this is that we’ve had a hefty 15% gain since the February lows and, I’ve said this previously, current P/E ratios are lofty close to record levels and investors are cautious. This could just be a technical correction. That being said and since we’re talking about technicals, a support line for both the Dow and S&P dating back to February has been broken so we may have some additional selling to endure.

This morning we’re getting some more follow through with the Dow down 49, which is a lot better than earlier when it was down 100. Unsurprisingly, the Asian markets closed lower on the follow through from U.S. stocks (Japan’s market has been closed all week and won’t open until tomorrow due to Golden Week celebrations) and European markets are trading lower, but not too badly, and let’s remember, closes matter a lot more than opens.

Oil

Rising output in the Middle East and North Sea corralled the bulls yesterday with WTI falling $1.13 closing at $43.65 and Brent off 86¢ settling at $44.97. Iraq said oil shipments from its southern fields averaged 3.364 million bpd in April, up from 3.286 the prior month. Iran also continues to raise its production and has increased exports to almost 3 million bpd which is up about 1 million bpd since the sanctions were lifted. North Sea production is forecasted to rise in June to its highest level in 4 months and up 17% from this month. So why is WTI up $0.761 this morning? Because 1) the API’s came out last night which although showed an increase in crude stockpiles, showed a bigger decrease in gasoline and distillates taking the aggregate to a decline in stockpiles of 2.5 million barrels with the 5 year history showing a small build, and 2) traders are focusing in on data recently showing U.S. production (which is the global marginal production) declining, and with those shale wells having a 50% decline curve the first year, well you can figure it out.

Courtesy of MDA Information Services LLC

Natural Gas

Natural gas posted a 4.4¢ gain closing at $2.086 but this followed a big sell off on Monday of 13.6¢, but this is after hitting near a 3 month high just below $2.20 last week. Remember, May expired at $1.995 and we’re trading up 5.1¢ this morning and the contango is pretty steep with October, one of the two lowest demand months of the year, trading almost $2.50. Like oil, traders are focusing on lower production, which is down about 2.5 Bcf/d from its February highs.

Weather forecasts are little changed with below normal temperatures this week in the eastern third of the nation, but this will change beginning next week and then you folks in the east will finally get some overdue and beautiful spring weather. All that beautiful weather will not result in any A/C load so we can expect to see some healthy injections into storage.

Elsewhere

Greeted with rum drinks and salsa dancers, the first passengers to cruise from the U.S. to Cuba in nearly 40 years landed at Havana on Monday. Setting sail from Miami shortly before 5 PM Sunday, the Adonia took nearly 17 hours to cross the Florida Straits steaming through waterway that was blocked by the U.S. during the Cuban missile crisis in 1962. And there’s more coming. More than a dozen cruise lines have announced plans to run U.S.-Cuba cruises. If all these actually begin operations Cuba could earn more than $80 million annually. The Cuban governments sees this as easy source of revenue that can bring thousands more American travelers without placing additional demand on the country’s all ready maxed-out food supplies and overbooked hotels.

And get this, the first major Hollywood film in over 50 years is shooting in Cuba as you read this. Fast 8, the 8th film in the Fast & Furious series starring Vin Diesel, began production last week. Until last year, 15 special permits were required for U.S. citizens visiting Cuba and director Oliver Stone was fined for filming there between 2002 and 2003 without the relevant permission.