Crude Oil

Holidays in Europe and Asia left things quiet overnight after some traders used the last day of April to frontrun the old "sell in May and go away" market adage. Market closures also kept the Chinese day trading hordes from using a tiny beat on the official manufacturing PMI print as an excuse to pile more money into the country's equity mania, while Japanese shares ended mostly unchanged as investors fret over when the BoJ will deliver the next shot of monetary heroin. In the US we'll get a look at ISM manufacturing and the latest read on consumer confidence as we head into the weekend.

The current equities bull run seems unstoppable. No amount of geopolitical concerns, Greek default fears, rate hikes, US dollar strength, crude oil price volatility, Russian sanctions or whatever else you can think of can put a dent on it. Perhaps we should take a step back and try to understand what is driving this strength. OK, we know that central banks continue to spike the punchbowl, but what is the actual transmission mechanism that directs all this liquidity into equities – as opposed to commodities for instance, which continue to struggle?

The biggest overnight story was neither out of China, where despite the ridiculous surge in new account openings and margin debt the SHCOMP dipped 08%, or out of Japan, where the Nikkei dropped 2.7%, the biggest drop in months, after the BOJ disappointed some by not monetizing more than 100% of net issuance and keeping QE unchanged, but Europe where for the second day in a row there was a furious selloff of Bunds at the open of trading, which briefly sent the yield on the 10Y to 0.38% (it was 0.6% two weeks ago), in turn sending the EURUSD soaring by almost 200 pips to a two month high of 1.1250, and weighing on US equity futures, before retracing some of the losses.

Today we get a two-for-one algo kneejerk special, first with the Q1 GDP release due out at 8:30 am which will confirm that for the second year in a row the US economy barely grew (or maybe contracted depending on the Obamacare contribution) in the first quarter, followed by the last pre-June FOMC statement, in which we will find out whether Janet Yellen and her entourage of central planning academics will blame the recent weakness on the weather and West Coast port strikes and proceed with their plan of hiking rates in June (or September, though unclear which year), just so they can push the economy into a full blown recession and launch QE4.

Following yesterday's early MNI rumor that a Chinese QE is being "considered" and which sent the Shanghai Composite surging 3% and led to an initial boost in US stock futures, overnight the PBOC scrambled to once again deny such speculation. Of course, going full "cold Turkey" on Chinese stimulus would be too much for the market to handle, so in a piece by the WSJ also released overnight, the author said the PBOC would pivot from outright QE to mere LTRO, which is also not new and was reported over a week ago here in "China Floats QE Trial Balloon, PBoC May Launch LTROs." In any event, for now at least, Asian stocks are not happy despite Apple's latest blockbuster results, and neither is Europe, with the Stoxx 600 down 1%, and even the E-mini is hugging 2100 unable to levitate on any imminent central bank intervention.

For 6 months, investors have been buying the idea - pitched by any and every status-quo-sustaining talking head, politician, and central banker - that low oil prices are unequivocally good for America. This has manifested itself in retail stocks handily outperforming the S&P. However, as Bloomberg notes, the last few weeks has seen that reverse dramatically as it appears investors, losing faith in the big-takers, have realized that "consumers aren't spending as much of the money saved from lower gasoline prices."

It appears the 'containment' of Greek FinMin Varoufakis has sparked exuberance in Greek bond markets. 10Y GGB yields are down over 60bps (and 3Y -275bps!) on the news. The machines appear to have decided now is the time to  dump dollars en masse.. and that has smashed crude oil and silver prices higher. Stocks have shrugged it off for now...

It has been a story of two markets so far, with China's Shanghai Composite up another 3% in today's continuation of the most ridiculous, banana-stand driven move of the New Normal (and there have been many ridiculous moves in the past 6 years) on the previously reported hints that the PBOC is gearing up to start its own QE, while Europe and the Eurostoxx are lagging, if only for the time being until Citadel and Virtu engage in today's preapproved risk-on momentum ignition, on Greek jitters, the same jitters that last week were "fixed"and sent Greek stocks and bonds soaring. Needless to say, neither Greek bonds nor stocks aren't soaring following what has been the worst week for Greece in months.

"The global economy is awash as never before in commodities like oil, cotton and iron ore, but also with capital and labor—a glut that presents several challenges as policy makers struggle to stoke demand," WSJ notes, suggesting yet again that QE can cause deflation when those who have access to easy money overproduce but do not witness a comparable increase in demand from those to whom the direct benefits of ultra accommodative policies do not immediately accrue.

"A government shutdown is very probable in the next three months due to the absence of liquidity to operate," Puerto Rico's finance officials warn, in an effort to shock lawmakers into action and avoid a potential "PRimbo".

Even though no rational person expected that the Greek situation would be resolved at today's talks in Riga, Latvia, apparently the algos were so caught up in spoofing each other to new record highs that futures, after surging once more overnight following the latest Google miss which sent the company and the Nasdaq soaring, actually dipped modestly into the red following headlines that the latest Greek talks have broken down after a "hostile" Troika "hammered" the Greek finmin, who was accused by European finmins of "being a time-waster, a gambler and an amateur."

There is mounting evidence that oil prices are poised to rebound from a historic bust. But what if the bust is not over yet? Despite the signs of a rebound, ExxonMobil’s CEO Rex Tillerson has a much more bearish take on oil prices. Speaking at the IHS CeraWeek conference in Houston, Tillerson predicted that oil prices would remain subdued for the next several years.

The Saudi bombing of Yemen is another flash point and will deepen tensions between the U.S., NATO allies and Russia and indeed China. Geopolitical risk remains high and the region remains a powder keg that is likely to explode as has already been seen in Syria and much of North Africa.

For now, EIA still estimates that total U.S. crude oil production will fall in May. But we think the current oil prices are enough to get the shale E&Ps excited.