May 5, 2017

Stocks opened flat this morning in the wake of the jobs report. The Dow is flat and the SPX is up .1%. The big news is a “flash crash” in oil prices last night. In yesterday’s session, WTI crude oil plunged over $2/barrel to $45.50/barrel. Overnight, it gapped down briefly to $43.76/barrel. These are massive moves in a very short period of time. This morning, WTI is back up around $46.50/barrel. Not surprisingly, energy is the best-performing sector today, up 1%. Most commodities are trading higher as well today (iron ore, gold, copper). Bonds are not really moving much, which is surprising given the jobs report. The 5-year and 10-year Treasury yields are trading at 1.89% and 2.36%, respectively. 

Oil is clearly the new fixation for traders. WTI crude is down 13% since the middle of April. The question is why? It’s certainly not because oil demand has fallen since then. Here’s what CNBC has to say: “U.S. oil production has been surging, and that and the recent return of some Libyan oil to the global market has exasperated the still oversupplied market.” It is true that US production is back up to 9.3 million barrels per day vs. peak production of about 9.7 million back in 2014. More importantly, it seems speculators are seeing an opportunity to short oil because there is some doubt that OPEC will be willing to agree to further production cuts. OPEC’s current production limit ends soon and the cartel will probably extend it for another 6 months. Finally, CNBC reports last night’s flash crash was due to forced margin call selling and automated computer trading. In other words, hedge funds speculating.  

The Employment Situation Report revealed 211,000 net new jobs created in April in the US. That’s a big rebound from the downwardly revised 79,000 tally in the prior month. The unemployment rate fell to 4.4%, the lowest in 10 years. The under-employment rate (U-6)—including discouraged job seekers and those working part-time because they can’t find a full-time position—fell to 8.6%. That’s the lowest since late 2007. And by the way, U-6 has spent very, very little time below 8.5% in the past 25 years. So it’s getting really difficult to deny the fact that we are now at full employment. Interestingly, average hourly earnings decelerated in April to 2.5% growth. Wage growth was in a fairly steady up-trend since the beginning of 2015 but has fallen back a bit with some recently economic weakness. Remember, the Federal Reserve is watching wage growth for signs of increasing inflation in the economy. This report confirms a strong labor market but still-modest inflation. 

France will hold a run-off election on Sunday to elect its next president. Marine Le Pen, the populist candidate, is feared by investors because she wants to remove the country from the European Union and drop the Euro currency. As with the first round election, she is expected to lose. But if she ekes out a win, you can expect capital markets to reflect increasing uncertainty in Europe. 

I’d like to pass along a quote Bloomberg picked up from BlueBay’s Mark Dowding. “We may be moving into an environment when the main thing investors fear is fear itself. As US equity indices move to new highs and volatility indicators drop to new lows, it is tempting to think that there must be widespread complacency. However, we are at a point in the cycle where global growth is relatively robust, monetary and fiscal policy is accommodative, inflation remains stable at low levels and profits are growing. Moreover widespread calls from analysts citing market valuations as over-stretched may highlight the fact that many are under-invested in stocks and would love to add on a pull-back in prices.” 

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