Crude Behavior

Crude behavior.  Stocks closed mixed yesterday as traders awaited the earnings onslaught over the next two weeks.  A jump in crude oil prices gave investors a reason to drive up energy shares and question treasury yields.

WHAT YOU NEED TO KNOW:

1)  Crude oil is still important.  The price of crude oil shot up yesterday closing over $65 / barrel after the Administration announced that it would let waivers for sanctions on Iranian oil exports expire.  In other words, countries who were given a pass to import oil despite the US embargo will lose that privilege, which means a decrease in supply.  Decrease in supply leads to higher prices.  Energy stocks traded up yesterday in response to the move.

2)  Inflation can’t be ignored.  Since December 24th of last year, stocks have enjoyed an epic recovery in response to the Fed’s policy shift.  Crude oil too has risen during the period since December 24th largely due to supply cuts by OPEC and increased demand.  Chinese economic stimulus is also a factor as the world’s second largest economy is showing signs of a recovery. China is the second largest consumer of Oil in the world and a healthy economy means more oil consumed.  Now back to inflation.  Fuel costs are a big factor in both consumer and producer prices. Crude oil is also used in the production of other products such as plastics which also become more expensive when the commodity goes up in price.  Crude prices have risen +55% since late December and many economists expect to start seeing a pick up in inflation as a result.

3)  Housing is still in a funk, but things may get better soon.  Yesterday, the National Association of Realtors’ release of its Existing Home Sales figure showed that sales receded by a greater than expected -4.9% month over month after last month’s +11.2% spike.  Though the number does not appear to be good on its face, experts expect sales to pick up as a result of a decreasing price trend, lower mortgage rates, and the warmer weather.

THE MARKETS:

Stocks appeared to be on hold yesterday as investors await prompts from earnings.  The S&P is now just around 0.7% below its all time high and the index managed to close up by +0.1%, led by the energy sector which rose by +2.1%.  The other major indexes closed mixed with the Dow Jones Industrial Average closing down by -0.18%, the Russell 2000 selling off by -0.36%, and the NASDAQ 100 trading up by +0.31%.  The struggling small-cap Russell 2000 has some traders concerned as it is looked on as a leading market indicator and if it is unable to find new highs, the larger cap index’s moves may be unsustainable.  Bonds sold off yesterday as the positive move in crude prices prompted traders to think about an increase in inflation.  When investors expect inflation to increase they require higher yields to compensate for higher costs of living.  Higher yields means lower prices and bonds traded off yesterday leaving the ten year treasury yielding 2.58%, up +3 basis points.  To put things into perspective, the 12 month Treasury Bill yields 2.45%.

WHAT TO LOOK FOR TODAY:

This morning we will get New Homes Sales from the US Census Bureau and economists expect sales to have fallen by -2.7% month over month compared to last month’s increase of +4.9%.  On the earnings front we will hear from a number of companies before the open including Twitter, Lockheed Martin, eBay Verizon, Coca Cola, and Proctor and Gamble.  The US Treasury will auction off $40 billion 2 year notes this afternoon and Larry Kudlow is expected to speak today.

daily chartbook 2019-04-23

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