Equities and the Economy:

U.S. equities failed to hold on to their early morning gains ending the day in the red. After being down by as much as 138 points the Dow fought back finishing the day down 85 points, 0.47%, at 18,168. The S&P 500 fell 11, ½%, to 2,150 and the Nasdaq as off 11, 0.21%, ending at 5.290. Two things affected the market yesterday. First, Fedspeak. The hawks were circling yesterday with Ms. Mester, Cleveland Fed President, stating that the Fed may consider raising interest rates at the November meeting. This caught the market completely off guard because no one expects the Fed to make any move that close to the election. Ms. Mester’s voice carries weight because she is a FOMC voter. Now Ms. Mester is known to be a hawk and this must be considered. That being said, this is still Janet Yellen’s Fed and she’s a dove. The other thing is the dollar. It’s strong, which means our exports are more expensive which weighs on multi-national corporation income statements. On a side note and speaking of currencies, the Brexit vote is having ripples. The British pound sterling traded at its lowest level in more than three decades vs. the U.S. dollar.

Turning to the economic news, the major news was that The International Monetary Fund yesterday lowered its outlook for the U.S. economy. It cut its 2016 GDP growth forecast from an already weak 2.2% to 1.6%. Further, the Fund warned that global growth faces challenges from events such as Brexit. Today the big report is the ADP private jobs report which is the prelude to the big report on Friday which is the Labor Department’s jobs report for September.

The Asian markets closed higher overnight while European markets are currently mixed. It’s risk-on this morning with the Dow up 94 points.

On worries of higher interest rates gold got hammered yesterday falling more than 3% settling at $1,269.70/oz. and having its worst trading day since 2013. Gold is a non-interest bearing asset and when interest rates rise folks move out of gold. Folks move into gold primarily as a safe haven.

Italy did a first yesterday. It issued 50 year sovereign bonds. Yes fifty year! The bond matures in 2067! The yield was 2.6%. Despite all the troubles there including a beleaguered banking sector, political risks associated with a December 4th referendum and faltering economic growth, demand was strong. In an environment where negative interest rates exist everyone is searching for yield, even if it’s only 2.6%.

Oil

After rising for 4 consecutive days it was a choppy day for oil prices with WTI falling 12¢ to $48.69 and Brent down a meaningless 2¢ settling at $50.87. That being said, Brent hit a 4 month high yesterday. We continue to see short covering and the ripple effect of the OPEC announcement of a production freeze agreement. This morning oil continues to trade higher, 82¢ (we’re getting close to $50!) but this isn’t because of OPEC. Last night the API released its weekly crude and products report and it was decidedly bullish. Whereas analysts were looking for a build in crude inventories of 2.6 million barrels the actual number was a decline of 7.6 million barrels. Now gasoline inventories rose more than expected, by 1.7 million barrels, but that data point was dwarfed by the crude data. The EIA releases its report today. Remember, reporting to the API is voluntary. Reporting to the EIA is mandatory.

Goldman Sachs released a report this morning saying the WTI price will stall at $55. They said U.S. shale drillers will get back to work and will produce a “wall of supply” at that level. They added that global oil markets remain “very oversupplied” in 2017. We’ve seen the rig count rise 12 of the last 13 weeks and is at its highest level since February. $55 will work quite well.

Courtesy of MDA Information Systems LLC

Natural Gas

Natural gas prices rose marginally yesterday, 4.1¢, closing at $2.964 in a choppy day. The market is in equilibrium at this level. Record power demand has pushed prices higher but as we go higher coal will be substituted for natural gas. Yes there’s been a lot of coal plants decommissioned, particularly in the upper Midwest, but coal fired generation still produces about 40% of this country’s electricity. The electric generation sector in this country is the swing demand for natural gas. Coming out of the anomalously warm winter we had near a 5 year high surplus of 188 Bcf of gas in storage. We simply could not inject gas into storage over the summer at the average 5 year injection rate. We don’t have the storage capacity. So natural gas prices decline to the point where they displace coal in electric generation. It’s been this way for decades.

This morning is beginning benign with natty down 2.1¢. Chatter. The next news worthy event is tomorrow’s EIA storage report.

Elsewhere

Times can be funny. An example, in 1910 there was the “Great Comet Scare.” At the time Halley’s Comet was making its routine pass by the earth. Technological advances in scientific equipment enables astronomers to study the comet and its tail better than ever. Observations revealed that the comet’s tail consisted of a highly poisonous gas called cyanogen. Scientists calculated that the Earth would briefly pass through the tail of the comet but stated that this would be harmless with the only noticeable effect being that the Earth would have more vivid sunsets for a while. The media, looking to sell more newspapers, didn’t focus on the harmlessness of the event but emphasized the fact the Earth was passing through a poisonous gas. This sparked an hysteria in the public and although scientists reassured the public nothing cataclysmic would happen, the seed was sown. So how did the public respond? They barricaded themselves in their homes, they filled cracks in their walls with anything they could find to prevent air from getting in from the outside, the bought special “anti-comet umbrellas,” and they even purchased and consumed “ant-comet pills.” We sit here and chuckle about their naiveté, but it seems every generation has stuff like this. I wonder what people a hundred years from now will be chuckling over about us?

Bob Shiring