154 More Days
Major indices inch higher. ECB corporate bond buying kicks off. JOLTS report. World Bank cuts forecast. Dollar down, commodities up. The 800 pound gorilla. 154 more days.
Financial Review by Sinclair Noe for 06-08-2016
DOW + 66 = 18,005
SPX + 6 = 2119
NAS + 12 = 4974
10 Y – .01 = 1.70%
OIL + 1.01 = 51.37
GOLD + 18.90 = 1263.10
The Dow closed above 18,000 for the first time since April.
The European Central Bank’s corporate-bond buying program kicked off this morning with the bank buying debt issued by companies including Anheuser-Busch InBev, Telefonica, Siemens, and Renault. Borrowing costs in Europe had already fallen to unprecedented levels with the average yield on investment-grade company notes in euros dropping to 1 percent this week. In the sovereign debt space, where the ECB also continues to be a buyer, the yield on Germany’s 10-year bund is within a hair of turning negative, falling to (yet another) record low of 0.033 percent this morning.
Commerzbank, one of Germany’s biggest lenders, is examining the possibility of hoarding billions of euros in vaults rather than paying a penalty charge for parking it with the European Central Bank. Such a move by a bank part-owned by the German government would represent one of the most substantial protests yet against the ECB’s ultra-low rates. Although no decision has yet been taken, the lender has held discussions on the matter with German authorities.
The bulk of negative-yielding debt is concentrated in Japan and Europe. Globally, the total is now $10.4 trillion, according to Fitch Ratings. Individual European countries that do not use the euro are largely trying to weaken their respective currencies, as investors flock to safety. The European Central Bank, which oversees the euro, introduced negative rates to stimulate growth in the Eurozone. The Bank of Japan also wants to stimulate growth, as well as weaken the yen. The goal is the same: Flood the financial sector with money, hoping that it chases yield into riskier investments. But if the goal were to coax money into riskier assets, such as stocks, the plan has been a failure so far. European stocks were down 30% at one point after the introduction of negative rates. In Japan, stocks are up only slightly since the beginning of the BOJ’s experiment in January of this year.
Job openings hit 5.8 million at the end of April, up slightly from 5.76 million openings in March, according to the Job Openings and Labor Turnover Summary (JOLTS) report. The report beat analyst consensus estimates of 5.7 million job openings for the month. The job openings rate was 3.9 percent in April, with the biggest increase in wholesale trade, transportation, warehousing, and utilities at 65,000 openings. Professional and business services saw the biggest decrease, down 274,000 openings. April hires fell to 5.1 million, slightly lower than the previous month’s 5.3 million. The hiring rate was 3.5 percent, little changed in the private sector and down 31,000 for government hires, according to the report. There were 5 million separations, which includes quits, layoffs and discharges.
Last week’s anemic jobs report for May pushed interest rates lower, but the desire for mortgages was already on the rise. Mortgage application volume jumped 9.3 percent last week from the previous week, according to the Mortgage Bankers Association. The volume may have been making up for a big drop two weeks ago, or reacting to a slight drop in interest rates. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 3.83 percent from 3.85 percent, with points decreasing to 0.33 from 0.36 (including the origination fee) for 80 percent loan-to-value ratio loans.
The World Bank slashed its global growth forecast. The World Bank cut its global growth forecast for 2016 to 2.4% from 2.9% as a result of “sluggish growth in advanced economies, stubbornly low commodity prices, weak global trade, and diminishing capital flows.” The bank sees “mounting risks” and expects a “further slowdown in major emerging markets.” Specifically, China’s growth is forecast to slow to 6.7% from 6.9% and both Russia and Brazil are expected to see “deeper recessions” than initially forecast. India’s growth is expected to hold at 7.6%.
While oil markets will start rebalancing after a slump next year, an oversupply in natural gas won’t disappear until the end of the decade, the IEA warned, slashing its gas demand outlook for a fourth straight year. “Slower generation growth, rock-bottom coal prices and robust deployment of renewables constrain gas’s ability to grow faster in today’s low-price environment.” Global consumption will expand by 1.5% annually until 2021, down from last year’s forecast of 2% growth through 2020.
Meanwhile, both Brent and WTI are holding strong above $51 per barrel, helped by industry data showing a larger-than-expected drawdown in U.S. crude inventories, worries about attacks on the Nigerian oil industry and strong Chinese demand. According to data from the API on Tuesday, oil stockpiles fell by 3.6 million barrels last week. Energy Information Administration figures released today show a 3.2 million barrel drop in inventories.
The dollar declined against the yen. The euro edged up. The dollar index was down again today. The dollar has lost some of its strength after Friday’s disappointing jobs report. That has helped energy companies, as well as mining companies and chemicals and machinery makers and commodities in general; a weaker dollar makes American goods more affordable in other countries. If the Fed were to raise rates or even suggest that the recent jobs number was just a transitory anomaly, then the lack of strong fundamental support could produce a rather pronounced correction to the down side. Consider that oil traded today at nearly a 100% increase off of the lows that were created just this February; that kind of price movement is not just a simple supply-demand story.
The International Energy Agency reports that 1.26 million electric cars, both battery and plug-in hybrid, were sold worldwide in 2015. Is that a lot? It depends on how you look at the numbers and who is asking the questions. The trend is certainly up. Keep in mind that there were only a few hundred electric cars on the road in 2008 and the current number is a lot higher than anyone would have expected back then. The number has tripled just since 2013. The United States now has 400,000 electric vehicles on the road, a massive increase since 2010. But there is still a long road ahead, and that road is full of cars with gas engines. There are 1 billion vehicles on the road worldwide at present and that number is expected to increase dramatically in the next 20 years as demand in countries like India and China continues to soar. For now, lower gasoline prices are an obstacle for more electric vehicle sales.
According to Fortune’s annual ranking of companies by revenue, Walmart is still the 800 pound gorilla. With $482 billion in revenue, it sells more than Apple, Amazon and Microsoft put together. It’s bigger than the No. 2 company, Exxon Mobil, and No. 3, Apple, combined. Its sales are greater than the GDP of Poland. That’s based on revenue. Forbes puts together a list of the 2000 biggest companies around the globe, and revenue is just one metric they use. According to Forbes, the top 3 spots on their list are held by Chinese banks.
Today’s top gainer was a microcap stock called Gevo, up 102%. On Tuesday, Alaska Air Group flew two flights using the company’s renewable alcohol to jet fuel. The flights departed using a mixture of traditional jet fuel and a 20% biofuel blend made from fermented corn. They flew from Seattle to San Francisco and then on to Washington DC. The airline estimates that the 20% biofuel blend will reduce greenhouse gas emissions by 50%
Keurig Green Mountain is pulling the plug on Kold, its countertop soda machine. Many consumers balked at the price of the device, which initially cost $369, and its pods, which had cost $1.25 to make an 8-ounce drink. The move comes 10 months after Keurig rolled out Kold and three months after JAB Holding, a major global coffee player, took the company private for about $14 billion.
When Aubrey McClendon drove his Chevy Tahoe into a bridge the day after he was indicted for allegedly rigging the price of oil and gas leases, suspicions arose that he had killed himself. But a two-month probe by Oklahoma Police has found nothing to suggest the Chesapeake Energy founder committed suicide. Investigators found no information that this was anything other than a car accident, but also admitted: “we may never know 100% what happened.”
Reports of Roger Goodell’s death have been greatly exaggerated; actually his passing was an outright lie – the result of a computer hack. The National Football League became the latest high-profile victim of hackers as the league’s official Twitter account was intercepted and wrongly announced the passing of NFL Commissioner Roger Goodell. The tweet has been deleted. Goodell is alive and well.
The primary season effectively wrapped up last night. Both the Republicans and Democrats have a presumptive nominee. And what the primary season has taught us is that most states don’t know how to hold an election. Whether it was a lack of polling places in Arizona, or voters scrubbed from voter rolls in New York, or far too many provisional ballots that will likely never be counted in Texas, or broken machines and polling sites that opened late in California, or a judge’s ruling today in Ohio striking down provisions of the state’s recently enacted voting laws; it all points to confusion and the potential for big problems. By the way, we have 154 days until the Election Day. Good luck.