Basic economics continues to drive the markets

Stocks traded down yesterday, erasing early gains as overseas yields climbed.  Crude oil continued its rise reminding investors that inflation is not going away so quickly.

N O T E W O R T H Y

Reckoning.  With the debt ceiling problem out of the way… for a few months… investors had a chance to have a fresh look at what will drive the markets in the weeks ahead.  Yesterday was a US bank holiday, which not only means no lollipops for the kids and grandkids at your local branch, but also that the cash Treasury market was closed.  So, if investors were looking for bond yields as a driver for equities, it could not be found… easily. Investors, however are a wily bunch and quickly turned their sights on overseas markets for some clues.  The UK’s 10-year Gilt was higher by +3 basis points, while the German 10-year Bund yield rose in early trading.  The driver for those upticks was most likely the ever-rising price of crude oil.  By 8:00 AM EST yesterday morning, North Sea Brent Crude oil futures were trading above $84 a barrel while the more local West Texas Intermediate Crude futures were around $82.  The actual prices were not the factor as much as both were trading at multi-year highs after a rapid climb from last year’s pandemic lows.  WTI ran up by some +151% while Brent surged by around +126%.  My regular readers have heard me say that “oil IS the oil of industry.”  That is to say that crude oil is the basis for much of what we create in the global economy.  Beyond fuel, which is a big one, crude is used for many other products such as plastic, nylon, synthetic fibers, pharmaceuticals, fertilizer, asphalt, epoxy, and even detergents.  The list goes on and on, believe me.  Just think of all the plastic found in… everything from cars to cellphones to computers.  Plastics!  So, when the price of crude oil goes up so high, so fast, there are bound to be inflation consequences.  The reason for the commodity’s rise is through-the-roof demand as the global economy roars back to life. Of course, OPEC+ intentionally limiting supply is also affecting the price.  Seems like a common theme these days.  Historically, crude oil has an inverse relationship with the US dollar. Because oil is principally traded in dollars, a weaker dollar makes oil cheaper to foreign buyers, so crude prices rise.  Conversely, a stronger dollar, as we have recently witnessed, typically causes crude prices to fall… except during times when demand is so very strong… like right now.  Ok, so inflation, is once again the culprit, causing non-US sovereign yields to climb ultimately spooking US stock investors in yesterday’s session. In other news yesterday China hit the tape by announcing some more crackdowns on financial companies, and more crackdowns are not welcoming news for stock investors.  Oh, and remember last Friday when the monthly jobs number missed… by a mile… or 1.6 kilometers for my non-US readers?  Yeah, there was that too. Also weighing on investors is third quarter earnings season which begins tomorrow with JPMorgan Chase’s pre-market earnings announcement.  Last quarter (Q2) was a hot one with S&P500 average earnings climbing more than +80% from a year earlier.  In this upcoming earnings season, S&P500 earnings are expected to grow by almost +28%.  Sure that is lower than last quarter’s, but it is still quite high relative to historical growth.  A big challenge in the upcoming earnings season is that investors now have high expectations and are likely to punish the misses harshly.  Even beats will be highly and roughly scrutinized.   As you might suspect, much of this fantastic earnings growth is already priced into the market, so investors will be keen on hearing what companies say about forward looking prospects (forward guidance) as well as supply chain challenges and rising input costs. We all know by now, that any input costs that are reliant on petroleum… are going up.

THE MARKETS

Stocks fell yesterday as overseas sovereign bond yields rose and crude oil prices hit multi-year highs, evoking fears of inflation. The S&P500 fell by -0.69%, the Dow Jones Industrial Average fell by -0.72%, the Nasdaq Composite Index slipped by -0.64%, and the Russell 2000 Index gave up -0.56%.  Bonds had the day off.  Cryptos added +0.25% and Bitcoin added +3.44% topping 57,341.  The S&P500 ESG Index traded off by -0.62%.

NXT UP

– JOLTS Job Openings (August) is expected to show an increase to 10.954 million vacancies from 10.934 million.

–  Fed speakers include Clarida, Bostic, and Barkin.

– Fastenal announced earnings this morning and beat on both EPS and Sales.

IMPORTANT DISCLOSURES.

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