A non-bombastic look at the week ahead in the capital markets.
"...The negative divergence of the markets from economic strength and momentum are simply warning signs and do not currently suggest becoming grossly underweight equity exposure. However, warning signs exist for a reason, and much like Wyle E. Coyote chasing the Roadrunner, not paying attention to the signs has tended to have rather severe consequences."
Well that was a quick geopolitical event. On the heels of what was set to be Crude's best week since July 2013, Stratfor clarifying little risk of disruption to crude supplies, Goldman confirming neglible impact from Yemen and more to Iran, and reports from Saudi Arabia that "this [Yemen] operation will not go on for long, I think it will be days," WTI crude has tumbled back to the $48 handle and erased all the "gulf intervention" premium - refocusing on domestic storage concerns.
In 2008/9, the rig count decline 18 weeks straight (dropping 57% overall over a 41 week period). Today's mere 21 rig decline to 1048 marks the 16th straight week of drops (down 45%) and is the smallest drop in 11 weeks. This is the biggest 16-week decline in rig count in 30 years. Crude is not reacting significantly yet but it appears the limits of efficiency gains before production takes a hit.
Crude oil prices have rallied sharply this week on headlines that a coalition of Sunni-ruled nations initiated airstrikes on Yemen against Shiite Houthi rebels. Goldman's Damian Courvalin notes that this rally reversed the sell-off that occurred in part on the rising odds of a deal with Iran being reached. Courvalin expects both events to have negligible near-term supply impacts, with the build in crude inventories set to continue in 2Q15. Longer term, a deal with Iran could lead to greater OPEC supplies although the timing of the sanction relief remains uncertain. It appears today's weakness indicates a dawning realization that there's still too much...
After a few days of dollar weakness due to concerns that the Fed's rate hike intentions have been derailed following some undisputedly ugly economic data (perhaps the Fed should just make it clear there will never be rate hikes during the winter ever again) the USD has resumed its rise, and as a result risk assets, after surging early in the overnight session driven by the Nikkei225 and the Emini, the "strong dollar is bad for risk" trade has re-emerged, with the Nikkei dropping almost 500 points off its intraday highs, with US equity futures poised to open lower once more, sliding nearly 20 points in the overnight session, and surprising the BTFDers who have not seen five consecutive days of "risk-off" in a long time.
Yesterday we saw the tracers against the dark night sky, tonight we get the video of Saudi warplanes bombing various Houthi positions. All looks quite "decisive" to us...
When CSX CEO Michael Ward arrogantly strode onto CNBC six weeks ago and proclaimed, he has "not seen any changes," suggesting everything's fine down to $30-35 oil and "expected no impact on crude shipments," we carefully suggested he was being a little careful with the truth. So, when today, the company issued the following statement:
*CSX DOESN'T EXPECT TO REACH HIGH END OF CRUDE-BY-RAIL FORECAST
We could not help but wonder just how rapidly the deterioration had occurred or if, once again, a CEO had come on business media and lied through his teeth.
Oil prices bounced back on March 24 on a sliding U.S. Dollar, and then again overnight on Middle East turmoil, but the pain may not be over yet.
After overnight strength in oil (post-Yemen) and bonds and gold (and weakness in stocks), the last few minutes have seen some of this reverse as chatter crosses the wire of the death of top Houthi leadership in Yemen. Oil prices are tumbling, the dollar is surging, and bond yields are spiking. Stocks are starting to creep off the lows...
In a somewhat surprising turn of events, this morning's futures reaction to last night's shocking start of a completely unexpected Yemen proxy war, which has seen an alliance of Gulf State launch an air, and soon land, war against Yemen's Houthi rebels, is what one would expect: down, and down big. This is surprising, because on previous occasions one would expect the NY Fed, or its pet hedge fund, Citadel, or the BOJ or ECB (via the CME's "Central Bank Incentive Program") to aggressively buy ES to prevent a slide, something has changed, and for the BTFDers, that something may be very fatal with the e-Mini rapidly approaching a 1-handle yet again. The offset to tumbling stocks, as previously observed, is oil, with WTI soaring over 6% in a delayed algo response to the Qatar headlines.
Forget about Rig Counts, we need to see Producer Counts go down considerably, until that happens the oil market hasn`t bottomed.