Equities cannot fight $135 oil and win. Maybe in a year or two; but not now. With the banks in trouble, and interest rates not going lower, which means they will stay in trouble for a good while longer, and with the FOMC minutes indicating a potential increase in unemployment over the short term and GDP growth lower for the next few years, combined with higher inflation, it appears the monetary authorities have finally succumbed to the word “Stagflation”.
Given that stagflation is a killer of both stock and bond prices, it’s not surprising to see a couple back-to-back 200-point losing sessions in the Dow 30. By the end of the day, the DJIA (-227.49 -1.77% to 12601.19), S&P 500 (-22.69 -1.61% to 1390.7), and NASDAQ Composite (-43.99 -1.77% to 2448.3) were crushed again.
The Utilities (XLU -0.51%) was a loser, but was still the best performing sector. The Financials (XLF -2.55%) followed a previous day’s loss of -2.45%. The biggest losers, however, were Basic Materials (XLB -2.93%) and Technology (XLK -2.63%).
Airlines ($XAL -12.0%) followed the previous day’s loss of -3.3%, proving that $133 oil doesn’t fly planes. With oil trading at all-time record high prices, American Airlines (AMR) announced it will cut capacity by -12%. The Broker-dealers ($XBD -3.2%) were also weak.
For the Cara 100 stocks, the leaders were: CEO +5.6%, MBT +3.6%, and VIP +3.5%. The losers were: BC -5.7%, GOL -5.7%, HDB -5.2%, and CCJ -5.2%.
The rising oil price is pushing down against the price of the US Dollar. Yesterday the trade-weighted $USD plunged a further -0.66% to 71.93, which is a two-day loss of over -1.5%. The Euro rallied +0.88% (+0.99% the previous day) to 1.5791 and the Yen +0.64% (+0.53% the previous day) to 97.04. The Cdn Loonie was also strong, up +0.87% to 101.72.
The 30-year long bond ($USB) lost -0.28% to 116.97.
This morning, the equity markets in Asia-Pacific were mostly down except for Japan (+0.37% to 13978.46). The All Ords index of Australia was flat. Shanghai (-1.65% to 3485.63), Hong Kong (-1.64% to 25043.12) and India (-1.95% to 16907.11) wwere weak.
In Europe in mid-session, the UK FTSE, French CAC and German DAX are down -0.36%, -0.77%, and -0.55% respectively.
The precious metals spot prices at 8:20am are: gold 925.54 (same as yesterday); palladium 450; platinum 2167; and silver 17.8475.
The near futures for Oil, the Euro and the DJIA are: 134.32 (with a high of 135.09 just after 5:00am ET); 1.5734; and 12615.
Comments & Outlook
UBS AG said today it plans to raise $15.5 billion in a very sweet rights issue. The -31% discount below the current share price is a significant response to the Bank Bulls who are saying the crisis is over. If UBS, with the best connections in the world, has to drop the price so much to replenish its capital reserves, then (i) there are more write-downs to come, and (ii) other banks are also trading at a significant premium to the underlying worth.
