Newsletter 080315 Final Volume 1 Issue 6
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The Fed kept interest rates unchanged at its latest meeting. While the US economy is expanding moderately, the global economy remains weak. The Fed signaled that it will raise rates when further improvement is seen in the labor market. Commodity markets declined after the meeting due to ongoing concerns about the global economy. The author remains bearish on oil and natural gas due to oversupply issues. Short positions in these sectors generated gains last week. The author will be monitoring US economic data and changes in the global supply/demand picture for signs of a reversal in prices.
Newsletter 080315 Final Volume 1 Issue 6
- 1. See important disclosures on last page 1 www.eqstrading.com SIGNALS We said on Tuesday that Wednesday was going to be epic, and luckily we adverted epic failure and were rewarded with si- lence. Nothing new, noth- ing earth shattering, just more of the same…stay the course…and we will take that as an epic success. The Fed continues to give us no real answers from the FOMC meeting statement that was released on Wednesday. Sec- ond quarter GDP expanded at 2.3% and Q1 GDP was revised up to 0.6% from the previous 0.2% contraction. In the state- ment, the Fed said the econo- my was expanding moderately and that rates would be left unchanged. In this case the silence of the Fed did little to calm foreign or domestic equities markets and the commodity slide, as we con- tinue to be short the energy sec- tor. The global economy re- mains on shaky ground and the United States remains one of the few bright spots in the world. (Continued on Page 2) And the Fed Speaks with Silence… Some good results this week! *EQS short signals of oil and prod- ucts were up on average 1.6% last week *WTI short was up a strong 3.68% last week for a total gain of 11.05% since the short call was made on 7-13-15 **You can achieve these results with discipline and by following the EQS daily trade recommen- dations and using the daily EQS Stop Loss guidance I N S I D E T H I S I S S U E : Fed Continued 2 Natural Gas 3 Oil and Products 4 Terms and Disclosures 5 EQS TR A D E RE C O M M E N DA T I O N S THE SOUR C E F OR C OM M OD ITY TR AD ING SIGN ALS Volume 1, Issue 6 August 3, 2015 A Weekly Publication on the Commodity Markets TM
- 2. See important disclosures on last page 2 www.eqstrading.com (Continued from page 1) Most of Wall Street has now reported strong and or growing earnings helped stock buyback bonanza that has helped boost earnings per share, however fear of lower future earnings have equites selling off from the market highs. We do not have a crystal ball, but it has long been our belief that a rate hike would not have been appropriate at this time. Though the Fed speaks with silence, they have made it clear that rates hikes are coming when the data shows that it is appropriate, regardless of whether the global and domestic economy is truly ready swallow it or not. The federal funds futures mar- ket is discounting a 40% chance of a rate hike at the next meeting on Sep 16-17, a 52% chance of a rate hike by the Oct 27-28 meeting, and a 96% chance of a rate hike by the Dec 15- 16 meeting. There does not seem to be enough that could change in the next few months to boost economic outlook to call for a September hike. An October rate hike could really put the brakes on holiday spending which would have a major impact on spending and put a real hit on the Q4 numbers. The last thing the Fed wants is to start off 2016 behind the 8 ball. December may shape up to be the best hope of an adverse market reaction, but no matter how bad main street wants Washington DC out of the lime light, with the 2016 election year in around the corner, the closer to election date we get the more front and center a hike will become. You can bet whatever the Fed does will be the center of what will likely be the number one priority of candidates and voters… the economy. Since the Fed remains silent, we have to use some clues and look around the world. Though there are millions of variables and data points, economics boils down to simple common sense. Common sense tells us that a raise hike is not yet justified. At this point we will take Wednesday as an epic success! On the flipside, we have noted that global economic health looks less than excellent. We know that rates cannot stay low in perpetuity, but if a recession is coming there will be very fee tools to fight it if rates are at or near zero, and for that the Fed is running out of time. THE FED SPEAKS….(CONT.) The FED "anticipates that it will be appropriate to raise the target range for the Fed funds rate when it has seen some further improvement in the labor market..."
- 3. See important disclosures on last page 3 www.eqstrading.com Weather and short covering continues to be the driving factor of any upward price moves that occurred during the last week. We continue to stay disciplined with stops, and with this ap- proach we were still able to bring home a 1.76% gain for the week from our continued short posi- tion. EQS remains bearish as natural gas continues to be oversupplied. US production is climbing amid growing dry shale production. This is in light of a meaningful drop in natural gas rig count. De- mand has been supportive with record high pow- er generation. Additionally, industrial demand growth and coal plant retirements have support- ed natural gas demand and recently electricity from natural gas demand surpassed coal for the first time. However, this has not been enough to change market sentiment as data from the CFTC still shows non-commercials hold a large net short position in the market. It is beginning to sound like a broken record as the resistance line that we have been watching continues to hold. Natural Gas: Weather and Supply Bearish Natural Gas
- 4. See important disclosures on last page 4 www.eqstrading.com Bearish global fundamentals remain center stage and continue to push prices lower in the oil and products sector. As the market continues to digest oil prices, we are seeing more and more extreme predictions from $20 to $30 oil by the end of the year, to the flipside of bulls touting $75 to $100 oil. For now China and Iran look to be the major factors that could leg oil down further. As we talked about last week, losses began to ac- celerate as soon as the $50 psychological barrier broke. US rig counts have begun to creep higher again, even with petroleum inventories above 5- year range and no meaningful drop in US produc- tion. This could be due to producer locking in hedg- es when prices were above $60/bbl. Nevertheless, this rig count increase seems early, given the poor fundamental picture of high inventories. Further exasperating the supply glut is OPEC as Saudi pro- duction is reaching new highs. Demand is healthy overall, with US refinery capacity utilization remaining at the high end of the range – refineries are operating near maximum utilization because demand for products is high. A caveat is that demand is near seasonal peak levels so ap- proaching the fall shoulder months with high inven- tories is a bearish sign. As the fall refinery mainte- nance season gets underway we will likely see a shift back to crude oil stocks building. HOW IS YOUR CRYSTAL BALL? $100 OR $20 OIL? Bearish Oil & Products US and global PMIs are above 50 (indicating economies are expanding), but are showing a year-on-year decline which is bearish for oil demand growth. The US dollar is close to a resistance line in place since mid-march of this year. Any breakout above this resistance would have bearish implications for oil. Thus given the poor macroeconomic and funda- mental environment of the market, EQS re- mains bearish. EQS will be monitoring any meaningful de- cline in production as well as US dollar weak- ness to signal a change in price direction. But for now, it has paid to be short!
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