After yesterday's latest drop in stocks driven by "old economy" companies such as CAT, which sent the Dow Jones back to red for the year and the S&P fractionally unchanged, today has been a glaring example of the "new" vs "old" economy contrast, with futures propped up thanks to strong tech company earnings after the close, chief among which Amazon, which gained $40 billion in after hours trading and has now surpassed Walmart as the largest US retailer. As a result Brent crude is little changed near 2-wk low after disappointing Chinese manufacturing data fueled demand concerns, adding to bearish sentiment in an oversupplied mkt. WTI up ~26c, trimming losses after yday falling to lowest since March 31 to close in bear mkt. Both Brent and WTI are set for 4th consecutive week of declines; this is the longest losing streak for Brent since Jan., for WTI since March.
A slow week devoid of virtually any macro news - last night the biggest weekly geopolitical event concluded as expected, when Greece voted to pass the bailout bill which "the government does not believe in" just so the ECB's ELA support for Greek depositors can continue - is slowly coming to a close, as is the busiest week of the second quarter earnings season which so far has been largely disappointing despite aggressive consensus estimate cuts, especially for some of the marquee names, and unlike Q1 when a quarterly drop in EPS was avoided in the last minute, this time we won't be so lucky, and the only question is on what side of -3.5% Y/Y change in EPS will the quarter end.
Why are commodity prices, including oil prices, lagging? Ultimately, it comes back to the question, “Why isn’t the world economy making very many of the end products that use these commodities?” If workers were getting rich enough to buy new homes and cars, demand for these products would be raising the prices of commodities used to build and operate cars, including the price of oil. If governments were rich enough to build an increasing number of roads and more public housing, there would be demand for the commodities used to build roads and public housing. It looks to me as though we are heading into a deflationary depression, because prices of commodities are falling below the cost of extraction. We need rapidly rising wages and debt if commodity prices are to rise back to 2011 levels or higher. This isn’t happening.
In what may be the biggest story of the year, if confirmed, Greek newspaper To Vima reports that Greek Prime Minister Alexis Tsipras has asked Russian President Vladimir Putin for 10 billion dollars in order to print drachmas. But the real shocker: on the night of the referendum, word came from Russia that Putin did not want to support Greece’s return to the drachma. After that, Tsipras had no choice left but to “surrender” to German Chancellor.
Earlier today one of Icahn's favorite energy names (you won't find him tweeting about this one much thought) Chesapeake Energy, the second-largest US natural gas producer, announced it too is now scrambling to conserve cash (in this case $240 million per year) by suspending its dividend payment.
- Gold claws back ground, European assets lose Greek tarnish (Reuters)
- Greece's Euro Exit Back on the Agenda Next Year, Economists Say (BBG)
- Greece submits bill needed to start rescue talks (Reuters)
- Wall Street Lenders Growing Impatient With U.S. Shale Revolution (BBG)
- Overtime Rules Send Bosses Scrambling (WSJ)
- As Markets Swing, Beijing Steadies Yuan (WSJ)
- Tennessee rampage suspect went to Qatar in 2014 (Reuters)
- Kathryn Dominguez to Be Nominated for Fed Governor (WSJ)
The nuclear industry in the United States has been at a standstill for several decades. After an extraordinary wave of construction in the 1960s and 1970s, the nuclear industry ground to a halt. Operating nuclear reactors for 80 years may be feasible, but wear and tear cannot only raise safety questions, but constant maintenance can make them economically unviable. Cracks can form in plants as they age, forcing the plant offline. The cost of repairs have already forced some power plants offline for good. The San Onofre plant in California, for example, was shut down by Southern California Edison after the bill to repair leaks ballooned. Duke Energy closed a reactor at its Crystal River power plant in Florida as repair costs got out of hand. Such incidents could be more frequent in the years ahead. But if the industry gets its way, some plants could operate well beyond their current 60-year licenses.
Today's action is so far an exact replica of Friday's zero-volume ES overnight levitation higher (even if Europe's derivatives market, the EUREX exchange, did break at the open for good measure leading to a delayed market open just to make sure nobody sells) with the "catalyst" today being the official Greek repayment to both the ECB and the IMF which will use up €6.8 billion of the €7.2 billion bridge loan the EU just handed over Athens so it can immediately repay its creditors. In other words, Greek creditors including the ECB, just repaid themselves once again. One thing which is not "one-time" or "non-recurring" is the total collapse in commodities, which after last night's precious metals flash crash has sent the Bloomberg commodity complex to a 13 year low.
Andy Brown, a top Shell official, said the Anglo-Dutch oil giant forecasts no quick rebound in the average global price of oil, but only a gradual recovery lasting five years. He attributed this sluggishness to a slowdown in China’s economy, leading a drop in demand for fuel, and the continuing oversupply of oil. “It will take several years [for oil prices to recover fully], but we do believe fundamentals will return,” Brown said. “Until such time, we, like other companies, will have to make sure we stay robust.”
If low oil pries are great for America "unequivocally," then the continued surge in Energy costs (+2.4% MoM in June) must be [fill in the blank]? PPI Final Demand rose 0.4% MoM - near the fatest pace in 3 years (beating expectations of a 0.2% rise) but fell 0.7% YoY. The huge gap between core and headline PPI continues to grow with PPI Ex Food and Energy rising 0.8% YoY, its first acceleration in 2015.
The dollar has been a stalwart of international trade over the majority of the last century. Around the time of the formation of the Eurozone, it reached its recent peak at 71.0% of official foreign exchange reserves. Since then, its composition of global reserves has more recently dropped to a more modest 62.9% in 2014. However, the dollar is slowly losing its status as the world’s undisputed reserve currency.
U.S. oil production has peaked... at least for now. That is the conclusion from a new government report that concludes that U.S. oil production is on the decline.
"Russia intends to support the revival of Greece's economy by broadening cooperation in the energy sector. Accordingly we are studying the possibility of organising direct deliveries of energy resources to Greece, starting shortly."
- Fed Chair Yellen To Speak As Global Tensions Rise (WSJ)
- Greek PM Tsipras seeks party backing after abrupt concessions (Reuters)
- France Hails Greek Aid Proposals as Germany Reserves Judgment (BBG)
- Greek PM says does not have mandate to exit eurozone (Reuters)
- France Intercedes on Greece’s Behalf to Try to Hold Eurozone Together (WSJ)
- Frozen Funds, Fleeing Tourists: Greek Startups Feel the Pinch (BBG)
- Doubts Simmer Despite China’s Gain (WSJ)
We previously questioned whether western sanctions imposed on Russia were being regularly breached by E.U. and Asian companies, noting that sanctions only work if all countries unite behind them. Now, only one year after being imposed, the sanctions are eroding as it seems that government and business policies are pulling in opposite directions. A U.S. State Dept. representative may have let the truth slip out recently when he noted, "if you tell us you’re going [to break a sanction], we’ll probably order you not to, but if you go and don’t tell us, we’ll probably do nothing."