June 29, 2015
As many of you know, the U.S. markets continue to hover around all-time highs. Many experts believe that further room for expansion (or growth) is likely while others believe a “pull-back” in the market is eminent. There is some merit to both arguments.
However, the question I hear most from clients is “Where do you think the market is heading?” While no one can predict with absolute certainty where the market is heading, world events provide strong indications of the direction for the short term.
As we near the end of the Second Quarter of 2015, I am paying particularly close attention to these world events: the Iranian Nuclear Deal, China and Greece, and the U.S. Gross Domestic Product (GDP) release.
As the June 30th deadline quickly approaches for the U.S.-led deal with the Iranians and their nuclear program, the markets are poised to take action. Many experts believe the deadline will come and go with no deal in place. However, these same experts believe a complete breakdown in talks is “unlikely”.
So why is that important? Expect volatility with oil and gas—especially in the short term. Here are some of the highlights. Since April, West Texas Intermediate Crude has ranged between $57-$62 per barrel. The less than $70 / barrel threshold has sparked a consolidation effort with the “shale producers” and reduced new-well start-ups by 50%. The Iranians eagerly want the sanctions lifted. They have stored between 30-40 million barrels of oil in tankers and are positioned to enter the market immediately. Capital analyst, John Kilduff, believes that if talks fail the price of oil could “rise $10 / barrel.” He goes on to say, the “knee jerk could be even higher.” In contrast a deal would mean an influx of supply, thus placing downward pressure on the price per barrel.
The next events concern the financial conditions of China and Greece. China’s eight month long bull-run appears to be running out of fuel. In recent weeks, China stocks have posted their biggest losses in 7 years, sending ripples across Asia markets. The primary causes are 1.) rapid expanding margin financing, 2.) monetary easing, and 3.) hopes of economic restructuring. Morgan Stanley predicts Shanghai’s benchmark falling 2-30% over the next 12 months citing heavy equity issuance, weak corporate earnings, and excessive levels of margin financing. Any setbacks in China will have consequences throughout the rest of the emerging markets of Asia.
Greece continues to present problems for Europe. Ahead of the June 30th deadline, the Dutch Finance Minister, Jereon Dijsselboem, confirmed the three major creditors “pulled together a common position” for a bailout deal. However, the Greek government would not support the deal and submitted its own proposal. The German Finance Minister characterized the proposal as a “move backwards”. No one wants to see Greece default. The effects would be crippling in Europe. But without a deal, there is no way to analyze the true short- and long-term effects on the European markets. With Europe continuing to struggle with an already sluggish economy and its 11.1% unemployment rate, their markets will continue to be tight for the considerable near future.
Finally, there is the U.S. market. First Quarter (Q1) GDP was revised to a paltry 0.7% growth. Zacks Market Strategy warns Q2 “may not be much better.” Zacks cites the following for this “soft” prediction: 1.) appreciation of the U.S. Dollar, which makes U.S. goods more expensive abroad; 2.) West Coast labor dispute disrupted the normal flow of goods to export markets, which resulted in a decrease in net exports; 3.) sluggish economic conditions in Europe and parts of Asia, which resulted in a decreased demand for U.S. goods; and 4.) lower oil prices, which has sparked domestic consolidation in the industry versus an expansion. With rumors of a Fed Rate hike in Q3-15, the markets may be poised for profit taking in the near future.
In summary, the markets remain at or near all-time highs. I would expect volatility in the oil and gas industry—especially as talks continue with Iran. Keep a close eye on China as they will undoubtedly have an impact on the Asian emerging markets. Greece will continue to be a drag on an already sluggish European economy, whether or not a deal is reached. Expect Q2 GDP to be “soft”. If the Fed follows through with rumored rate hikes in Q3, expect a pull-back from the current highs.
If you have any questions, please feel free to call.
Bryan Mark Rigg
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