Thursday, May 10, 2018

This Morning's Log Entry

Thought I'd share with you this morning's entry to our firm's market journal:

5/10/18 (Thursday)

Equities are having a strong week thus far, with the S&P up 1%. 

Energy has been screaming higher of late, up 2.8% this week and up over 7% the past month. I attribute easily half of the latest move in oil to geopolitics, the other half to strong demand and OPEC/Russia’s agreement. The move in energy stocks suggests that the market sees the price at sustainably profitable levels going forward. Oil futures are in backwardation but the forward prices are well above breakeven. Now we look for the extent of the ramp up in North America inspired by these prices, it’ll be interesting to see to what extent if any it thwarts OPEC/Russia’s efforts. 

Financials and industrials are also having a strong week. Both sectors have seen good earnings results from their constituents; banks are no doubt getting a boost from recently higher interest rates.

The dollar has rallied strongly of late as U.S. data has been notably better than Europe’s, in particular, with higher interest rates adding an extra boost.

Now, as for this morning, the dollar and the interest rate scenario is being turned on its head. After a below consensus read from yesterday’s PPI (but with overall trend still toward acceleration), today’s CPI came in below expectations as well (.2% vs .3% expected); that has bonds (yields lower) and gold rallying hard this morning -- and the dollar is getting absolutely crushed. 

All things considered, I, for now, view this morning’s market action as counter-trend for the bond market, more in-range action in gold and, if it persists, a testing of the dollar’s recent breakout. I.e., conditions, as I read them today, continue to lean me toward weaker bonds, weaker gold and stronger dollar on a trend basis going forward (barring geopolitical surprises in all 3 cases).




As for stocks, the softer tone around trade is huge and is allowing for positive earnings reports to hold their resulting higher prices beyond the first few hours post announcement. 

While I see some real potential for making up for what, were it not for the trade noise, could’ve been a strong move during March and April, we should still expect the market to struggle as mid-term elections approach. 

General conditions, as I read them today (always subject to change), support higher stock prices beyond what is likely to be a somewhat difficult (volatile) stretch…

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