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Crude oil at inflection point, as funds pour money into energy

Peter Kenny
Peter Kenny

By Peter Kenny, chief market strategist for Global Markets Advisory Group and owner of KennysCommentary.com

Themes:

  • US equities rally for a sixth consecutive week extending gains farther into record territory
  • Dow Industrials have posted 53 records in 2017 — sixth 1000 point milestone  in 12 months
  • US 10-year yield rallies 2.59%  on Friday to close out the week at 2.38%.
  • US 10-year yield appears to be ready to break out of recent range, fueled by broad strength in the economy and firm energy prices
  • Czech nationalist candidate and billionaire, Andrej Babis, dominates elections
  • Babis promises to oppose deeper integration into the EU, tougher immigration
  • Spain’s Rajoy will out Catalan leaders in blow to separatists – Bloomberg

Economic data and earnings rolling in, largely positive

Our equity market rally took another significant step forward last week despite several themes that had the potential to disrupt it. Concern over elections in Czechoslovakia and Japan as well as concern over a peaceful resolution to the Catalan separatist movement all weighed on investor outlook but not on stock prices. Investors here in the United States were more focused on economic data and Q3 earnings results, and to that end, they largely found reason to cheer.

In the case of economic data, last week’s figures were largely constructive and inline with consensus, with one glaringly positive exception. Weekly jobless claims unexpectedly fell again. For the week ending October 14, the weekly claims fell to 222k, well below both consensus of 240k and the previous week’s better-than-expected and revised 244k. As a result of these continuing gains, the 4-week M.A. has dropped to 248.5k. This data will likely add further momentum to monthly employment gains and to a drop in the official rate of unemployment later in Q4. October’s employment report is due for release on Friday, November 3.

Durable goods orders, due out Wednesday, are expected to reflect 1% growth on a M/M basis. Currently, orders stand at 5.1% Y/Y. On Friday, we receive consumer sentiment (c. 101) and the initial Q3 GDP estimate. Bloomberg consensus is calling for a gain of 2.5%. The final reading for Q2 was a healthy 3.1% after several revisions higher over the quarter, fueled in large part by better-than-expected gains in manufacturing. If Q3 GDP follows the same trend line in terms of revised acceleration and an indication that the final figures are north of Q2’s 3.1%, expect investors to more aggressively price in a move by the FOMC in December.

Key data releases scheduled for this week include durable goods orders, Q3 GDP and consumer sentiment. The economic landscape, as it currently stands heading into year-end, bodes well for an increase of 25 bps by the FOMC in December.

In the case of earnings, investors find themselves in a sweet spot as evidenced by equity price gains. Despite earnings disappointments by Dow Industrial components Proctor & Gamble (PG) and General Electric (GE) last week, index prices ticked higher. In fact seven of the 30 Dow Industrials (^DJI, DIA) managed a daily gain of more than 1% on Friday. Thus far this earnings season, 73% of companies that have reported have exceeded top-line estimates, while 80% have beaten on the bottom line according to Sam Stovall, chief investment strategist of CFRA.

This week’s earnings calendar will provide investors with a broader look at corporate profitability. Quarterly results from Amazon (AMZN), Microsoft (MSFT), Baidu (BIDU), Boeing (BA) and McDonald’s (MCD) are on tap.

Crude oil’s resurgence — can it last?

As I indicated would be the case in last Monday’s note, crude oil (WTI) remained above $50/bbl in intra-week trading again last week despite trading as low as $51.29/bbl at Thursday’s close. The strength we have seen in recent weeks for WTI crude is in some part due to OPEC production cuts and hurricane-induced supply constraints, but it has also garnered some price support due to an expanding domestic and global economy and expectations that higher prices for gasoline and diesel are on the horizon.

Investors are once again returning to the oil patch after the brutal sell-off that dominated the headlines three years ago. As a result the influx of investors and improving supply/demand metrics since late June of this year, crude has risen from a closing low of $42.53/bbl on June 21 to Friday’s close of $51.47/bbl — just shy of the $52.22/bbl recorded on September 25. Crude is also being supported by money managers boosting net long positions on benchmark US gasoline and diesel in recent weeks. The variable for energy investors is whether there is enough momentum in the trade to take crude prices above resistance at $54/bbl in coming weeks and months.

Source: Bloomberg

Given that energy, crude oil specifically, plays such a critically important role in inflation and given that the near-term trend appears constructive, this factor may well act to provide the inflationary push that Fed officials need to get to target.

——————————————————-
WTI Crude Oil (Nymex) (CL=F) $51.47/bbl
Gold (Comex) (CL=F) $1,281.70/t. oz.
10-year Treasury Note yield (CBOE) (^TNX) 2.376%
Volatility S&P 500 (^VIX) 10.21
——————————————————-

Sam Stovall | Chief Investment Strategist, CFRA

The DJIA has again eclipsed another millennium mark and the S&P 500 (^GSPC, SPY) is within 1.5% of a new century threshold. Factors inflating investor enthusiasm appear to include ongoing optimism toward U.S. tax reform and a rebound in Q3 and full-year S&P 500 EPS estimates. Indeed, an above-average 73% of companies that have reported thus far have exceeded top-line estimates, while 80% have beaten on the bottom line. “Where were you on Black Monday?” was the question on most interviewers’ minds Thursday, as Wall Street observed the anniversary of the Crash of ‘87, which dragged down stocks by more than 20% in a single day. Unlike 30 years ago, however, when the market had already recorded a more-than 16% decline from its prior peak, the DJIA, S&P 500 and Nasdaq (^IXIC, QQQ) all recently hit new highs and the FOMO (fear of missing out) mindset has yet to shift into high gear.

Economic calendar (all times Eastern):

Monday

8:30 AM Chicago Fed National Activity Index

Tuesday

8:55 AM Redbook

9:45 AM PMI Composite Flash

10:00 AM Richmond Fed Manufacturing Index

Wednesday

7:00 AM MBA Mortgage Applications

8:30 AM Durable Goods Orders

9:00 AM FHFA House Price  Index

10:00 AM New Homes Sales

10:30 AM EIA Petroleum Status Report

Thursday

8:30 AM International Trade in Goods

8:30 AM Weekly Jobless Claims

9:45 AM Bloomberg Consumer Comfort Index

10:00 AM Pending Home Sales Index

11:00 AM Kansas City Fed Manufacturing Index

Neel Kashkari,  10:30 AM

Friday

8:30 AM GDP

10:00 AM Consumer Sentiment

1:00 PM Baker-Hughes Rig Count