Labor Day Update - 9/6/21

Labor Day Update - 9/6/21

Please excuse typos.

Thought I would put out a short update on events over the weekend and today as the rest of the world was open for business outside the U.S.

Overall, equity markets were positive with US equity futures edging higher. NDX, was up by three tenths, SPX was by two tenths, and RUT little over one tenth.

Europe saw more robust gains, with the Stoxx 600 up the most in six weeks. Asia was led by Japanese stocks which added to Friday's gains after PM Suga announced his effective resignation, pushing to a 31-year high.

Not much news of note on US stocks other than Ryanair has ended talks over a big Boeing orders. Ryanair is Boeing's biggest non-NA customer.

Asia

The MSCI Asia Pacific Index rose 0.8%.

In the Chinese regulation de jure, China will now control the prices for after-school tutoring services. There were also some vague comments about monopoly risks from the State Administration for Market Regulation. Stay tuned there.

Chinese vehicle sales fell y/y - Toyota China Aug. Vehicle Sales Fall 11.9% Y/Y To 144,800 Units

While the "good" thing about all the lockdowns I guess is that inflation is now much more subdued in Australia - Australia Melbourne Institute Inflation (M/M) Aug 0.0% (prev 0.5%); Australia ANZ Job Advertisements (M/M) Aug -2.5% (prevR -1.3%; prev -0.5%)

As the selling in Chinese stocks is spilling over to companies that have an outsized proportion of their business from China. BBG.

And Nikkei 225 gets a "major overhaul". BBG.

Europe

The Stoxx Europe 600 rose 0.7%

In economic data, German July factory orders came in much stronger than estimates (although decelerating a bit m/m) but construction PMI for Germany for Aug missed coming in weakest in 3 months (but it hasn't been above 50 since pre-pandemic). UK construction PMI also missed but remains above 50. In both cases supply chains and costs were seen as the predominant issues. EU investor confidence for September came in around expectations but it looks like there was a massive revision so I'm not sure if it's worse or much better than August. I think that prevR number is wrong (this is from LiveSquawk).

Eurozone Sentix Investor Confidence Sep: 19.6 (est 19.7; prevR 0.0; prev 22.2)

German Factory Orders (M/M) Jul: 3.4% (est -0.7%; prev 4.1%); German Factory Orders WDA (Y/Y) Jul: 24.4% (est 18.9%; prev 26.2%); German Markit Construction PMI Aug: 44.6 (prev 47.1)

UK Markit/CIPS Construction PMI Aug: 55.2 (est 56.0; prev 58.7)

Usamah Bhatti, Economist at IHS Markit, which compiles the survey said: "Evidence that the UK construction sector began to feel the impact of ongoing supply chain disruption was widespread midway through the third quarter of 2021. Growth rates for overall activity as well as the three monitored subsectors eased further from the recent highs earlier in the summer. Similarly, new business inflows have continued to increase at a marked pace, yet even here the rate of growth has eased to a five-month low. "Supply chain disruption continued to disrupt activity across the UK construction sector, as demand for materials and logistics capacity outstripped supply. Average vendor performance continued to deteriorate at a near-survey record rate, as firms noted severe shortages of building materials, a lack of available transport capacity and long wait times for items from abroad due to port congestion. "As a result, the rate of input cost inflation faced by construction companies accelerated to the second-fastest on record, while the increase in subcontractor rates hit a fresh series high, fuelled by supply shortfalls in the sector. Despite this, businesses noted a stronger degree of optimism regarding the year-ahead outlook, as more than half of survey respondents predicted a rise in activity. This was underpinned by expectations that new contracts would be brought to tender across the construction sector as markets continued to recover from the economic disruption caused by the pandemic."

As UK looks to mend relationship with US.

Commodities/Currencies/Bonds

Bonds - No changes here as these markets were closed.

Forgot to mention on Friday, but this week we'll get $62B in 10s and 30s auctioned which is something to keep an eye on (the auction results). Those can be market moving as we've seen.

Dollar (DXY) - No change here.

Crude (/CL) - A lot going on in the oil market last couple of days with production remaining idled in the Gulf (now almost 18mb of lost production), demand crosscurrents (gasoline demand falling marginally in the US, but rising in Europe, India, and Brazil), traders starting to get more bullish, and a surprise price cut to Asia from the Saudis today which likely was the biggest factor in today's action where WTI pulled back by over 1% before recovering to finish down a half percent on very light trading finishing at $68.89. It remains above the rising 100-DMA support but below the falling 50-DMA. Those will converge soon, as prices will need to break one way or the other

On the Saudi price cut to Asia, it was the first time in four months as Covid has impacted demand there but left prices to Europe and NA steady. The price cut was the largest in a year and took the market by surprise.

As John Kemp updates on crude positioning with funds strongly moving into petroleum products with the second heaviest buying of the year overall although WTI positioning was down a little. Bullishness on middle distillates (diesel, etc.) as well as heating oil are at the highest since 2018.

LONDON, Sept 6 (Reuters) - Hedge funds purchased petroleum last week at the second-fastest rate this year after Hurricane Ida disrupted offshore oil wells and onshore refineries in the Gulf of Mexico.

Money managers purchased the equivalent of 60 million barrels in the six most important petroleum futures and options contracts in the seven days to Aug. 31 (https://tmsnrt.rs/3BI9A0P). Portfolio managers were sellers of NYMEX and ICE WTI (-1 million barrels) but buyers of U.S. gasoline (+6 million), U.S. diesel (+7 million), European gas oil (+21 million) and Brent crude (+28 million).

In the previous 10 weeks funds had sold the equivalent of 268 million barrels, according to position records from ICE Futures Europe and the U.S. Commodity Futures Trading Commission. But in the two most recent weeks, the rate of selling had decelerated and prices had started to rise, heralding a probable turning point and creating favourable conditions for a new wave of buying. In this context, the interruption to offshore oil production in the Gulf of Mexico and refining activity in Louisiana, which will tighten the availability of crude and refined fuels, gave extra impetus to the turnaround.

Fund managers have become especially bullish about prices for middle distillates such as U.S. diesel and European gas oil, where the ratio of bullish long positions to bearish short ones has climbed to 8.6 to 1. The bullish ratio was the highest since October 2018, before the coronavirus crisis and before the trade war between the United States and China intensified, adversely affecting global trade volumes. With freight demand expected to remain strong while the resurgent pandemic limits aviation and private motor traffic, funds are anticipating the imbalance in refined product demand will worsen, intensifying the diesel shortage.

As oil companies continue to struggle with restarting operations. Cumulative lost production now almost 18mb. Current estimates is that at least 25mb will be lost. And there's another storm brewing in the Gulf.

And appears we've passed the summer gasoline peak in the US.

While Europe is picking up (article also notes Brazil). BBG. Of course jet fuel demand remains well below 2019 levels and diesel is 4% below in Europe.

And rebel attacks on Saudi oil facilities continue.

Natural Gas (/NG) - After pushing to new highs pulled back to finish down half percent at $4.690.

Gold (/GC) -Finished down half percent at $1825, remains in uptrend.

Copper (/HG) - Finished just under unchanged levels.

Aluminum - A coup in Guinea, a big bauxite producer, pushed prices to highest in 10 years. China is the main destination for Guinea's bauxite, which is required to make aluminum, accounting for more than half of China's supply. Australia, who China has been in a snit with of late, is the next largest supplier. WSJ.

Misc.

Random stuff:

Last week the NDX outperformed the SPX, Naz, and RUT. It's just a continuation of what we've seen the last three months as "high quality" has been the place to be. BBG.

Which appears to be somewhat related to the "crash protection" put buying we've seen of late. As JJ Kinahan put it

“Longer-term, good balance sheets tend to outperform bad balance sheets. Investors, right now, because we’re at all-time highs, are nervous about a selloff, so what they’re saying is, ‘OK, if we do have a selloff, where do I want to be longer-term?’” JJ Kinahan, chief market strategist at TD Ameritrade, said in an interview. “So they may go down too, they may not go down as much. And they have a better opportunity to come back in a quicker fashion.”

And while volume has been notably low, it's actually just getting back into its "normal" pre-pandemic range. Another indicator that the pandemic skewed.

As negotiations in Congress on a continue on a variety of important topics that will start to come to a head in a few weeks.

To see more content, including summaries of most major U.S. economic reports and my morning and nightly updates go to Cbus Neil's Blog Posts for more recent or Sethi Associates for the full history.