Stocks gapped up at the open (Dow +167 pts; SPX +.4%). We’ll see if it holds. At the moment, the energy sector is leading, up 3% in the wake of an OPEC meeting. Telecoms and materials are also up over 1%. Tech, on the other hand, is lagging (-.4%). It seems investors didn’t like earnings announcements from Red Hat (RHT), Oracle (ORCL) and Micron (MU) earlier this week. European stock markets are poised to close up about 1% and Asia was mixed overnight. Trade war jitters have hit China’s stock market especially hard. The Shanghai and Shenzhen Composites are down 12-16% this year, around 2-year lows. The US dollar has strengthened against a basket of foreign currencies as a result of trade concerns. Not surprisingly, most commodity prices have fallen. Gold, iron ore, and copper are down on the year. Oil is still up though; WTI crude oil shot back up to $68/barrel (see below). Bonds are modestly higher in price, lower in yield today. The 5-year Treasury yield ticked down to 2.76% and the 10-year yield is hovering around 2.90%. The yield curve continues to flatten; the difference between the yields on the 2-year and 10-year Treasury bonds is down to just .36%. It’s hard to escape the conclusion that the stock & bond markets are telling us two different stories about the future. Stocks are worried about rising inflation but believe the economy is on a firm footing. Bonds, however, are telling us that inflation and growth are not going to accelerate.
OPEC met and decided to raise oil production targets by roughly 1 million barrels per day. Recall that for the last 18 months OPEC has operated under an agreement to reduce oil production by about 2.8 million barrels per day. The aim was to prop up oil prices because the Saudi Arabian government 1) needed more tax revenue to support domestic spending programs, and 2) wanted to support the IPO of its state-owned oil company Saudi Aramco. So on the face of it, today’s decision is a bit of a reversal. An alternate explanation is that OPEC countries never did cut by 2.8 million barrels, so this agreement just officially ratifies what they were doing anyway. We’re not really certain about Saudi’s long-term oil price target. Some say they want crude up around $80/barrel. But higher price levels also encourage US oil producers—who, by the way, are far more agile and efficient than OPEC producers—to drill more wells and ramp up production. This year WTI crude has traded between $60 and $70.
Technology has been the go-to sector for US investors since the presidential election. And why not, it’s been a dependable place to find growth. The S&P 500 Tech Sector Index is up over 12% this year. But this week the sector is lagging after some disappointing earnings announcements. Cloud software provider Red Hat (RHT) cut forward revenue guidance due to a temporary slowdown in sales. This could be a company-specific issue, but investors immediately sold shares of other cloud software companies like Sales Force (CRM), VMware (VMW) and ServiceNow (NOW). It could also be that analysts’ expectations have risen too high. For its part, Oracle (ORCL) also gave investors disappointing forward guidance. In addition, the company just changed the way it reports results to shareholders and no longer gives much information about its cloud business. Anyway, investors are beginning to wonder if some of these high fliers are priced for perfection.