Americans Take 3-Trillion-Mile Road Trip, Dollar Corrects and Commodities Rebound

The busy summer travel season is at our doorstep, starting this Mother’s Day weekend, and with that comes stronger fuel demand.

Back in March I shared the fact that Americans drove a record 3.05 trillion miles on U.S. highways in January 2015 for the 12-month period, with even more expected this year. Now the International Air Transport Association (IATA) revealed that international passenger traffic in March rose 7 percent from the same time a year ago. Except for Africa, every region around the globe recorded year-over-year increases in air traffic.

Americans Driving and Flying More

This week, West Texas Intermediate (WTI) crude oil prices reached a 2015 high, rising above $60 before cooling to just below that. This marks the eighth straight week of gains.

Investment banking advisory firm Evercore makes the case that the recent oil recovery is closely following the average trajectory of six previous cycles between 1986 and 2009. Although no one can predict the future with full certainty, this is indeed constructive for prices as well as the industry.

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Because oil remains in oversupply, the recent rally owes a lot to currency moves. The U.S. dollar, which has weighed heavily on commodities for around nine months, declined to its lowest point since mid-January. We might be seeing a dollar reset, which should finally give oil—not to mention gold, copper and other important commodities—much-needed breathing room.

The oil rig count continued to drop in April and is now at a five-year low. According to Baker Hughes, 976 rigs were still operating at the end of the month, down 11 percent from 1,100 in March and 47 percent from 1,835 in April 2014. Eleven closed this week alone. This spectacular plunge has had the obvious effect of curbing output and helping oil begin its recovery from a low of $44 per barrel in January. Production appears to have peaked in mid-March at 9.42 million barrels per day and is now showing signs of rolling over.

As I’ve mentioned before, a price reversal historically has occurred between six and nine months following a drop in the rig count. The number of rigs operating peaked in October and oil started to bottom in January.

Even though domestic oil inventories still stand at near-record levels—according to the Department of Energy’s weekly report, they’re at their highest level for this time of year in at least 80 years—the rate at which storage facilities are being filled is beginning to slow.

For the first time since November 2014, stockpiles declined at Cushing, Oklahoma, the nation’s largest storage facility and the pricing point for WTI.

Net Free Credit Hits Another Record Low
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China Continues to Stimulate Its Economy with Weak PMI Trend

Like oil, select industrial metals are making a welcome resurgence. Both zinc and copper have risen above their 50-day moving averages, with copper staging its strongest rally in about a decade.

Net Free Credit Hits Another Record Low
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Besides the dollar depreciation, much of this growth derives from the hope that manufacturing in China, the world’s biggest purchaser of copper, is set to pick up. The HSBC China Manufacturing PMI fell for the second consecutive month in April to 48.9, which indicates contraction in the manufacturing sector. But global investors and commodity traders are optimistic that China’s central bank will launch a fresh round of fiscal stimulus to spur purchasing and manufacturing. I’ve observed in the past that the Asian country is quick to respond to economic indicators such as the purchasing managers’ index.

Because of its ubiquity in building construction, electronic products and transportation equipment, copper is a useful barometer of economic growth.

Several mining companies that have exposure to the red metal are performing well year-to-date. Colorado-based Newmont Mining Corporation is up 38 percent for the year; Australia-based Northern Star Resources, 40 percent.

Agribusiness stocks have also drawn investors’ attention lately, as mergers and acquisitions (M&A) chatter has intensified.

Today, Syngenta, the giant Swiss producer of not only seeds but also herbicides and insecticides, formally turned down a $45 billion takeover by rival Monsanto. As I’ve discussed before, such offers and deals have typically made the stock of the company being considered for purchase more attractive.

Which Countries Would Suffer the Most if Greece Defaulted on Its Debt
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Ramped-up M&A activity has also in the past suggested that a bottom has been or will soon be reached. We saw this in the oil industry, with Halliburton acquiring Baker Hughes last November and Royal Dutch Shell taking over rival BG Group in April. It’s déjà vu all over again, as Yogi Berra quipped.

Several times before, I’ve reflected on the mind-boggling amounts of minerals and metals that are required to raise a child. We’re talking millions of pounds of materials per person per lifetime. Even so, we sometimes forget just how much of our daily lives depend on oil, metals, crops and other raw materials.

But this Sunday, remember that just as essential to raising a child is a mother’s love and dedication—the greatest and most priceless resource in the world.

Happy Mothers Day

Index Summary

  • The major market indices finished mixed this week. The Dow Jones Industrial Average rose 0.93 percent. The S&P 500 Stock Index rose 0.37 percent, while the Nasdaq Composite fell 0.04 percent. The Russell 2000 small capitalization index rose 0.56 percent this week.
  • The Hang Seng Composite lost 2.08 percent this week; while Taiwan fell 1.30 percent and the KOSPI fell 1.96 percent.
  • The 10-year Treasury bond yield rose 3 basis points to 2.15 percent.



Domestic Equity Market

The S&P 500 ended the week higher, up 0.4 percent on solid jobs data for the month of April.

S&P 500 Economic Sectors
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  • Financials outperformed this week as the 10-year Treasury yield increased sharply, leading to a steeper yield curve. The S&P 500 Financials Sector Index rose 1.59 percent this week.
  • U.S. factory orders for the month of March came in slightly above expectations this week. This is the first rise since last July and could benefit industrial companies.
  • As mentioned above, the 10-year yield shot up this week, revealing further signs of strength in the U.S. economy. With more investors leaving risk-free assets, it looks as though equities could see increased inflows.


  • Telecommunications was the worst performing sector this week as investors, seeing strength in the domestic economy, moved into more cyclical areas. The S&P 500 Telecommunication Services Sector Index fell 1.44 percent this week.
  • Energy stocks underperformed this week and investors were quick to take profits off the table. The S&P 500 Energy Sector Index fell 1.15 percent this week.
  • The U.S. trade balance came in well below expectations for the month of March. Companies with significant foreign exposure are being negatively affected by the strong U.S. dollar, reducing the export competiveness of domestic companies.


    • The Employment Cost Index spiked up this week, revealing stronger signs of inflationary pressures in the domestic market. Higher wages could translate into more spending power, which should benefit consumer-based stocks.

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    • Inflation expectations are also on the rise, as indicated by the recent breakout in the 5-year, 5-year forward breakeven inflation rate. This indicator shows that investors have a positive view on the future of the economic environment.

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  • The results of the University of Michigan Consumer Sentiment survey for the month of May will be released next week. If the reading comes in strong, consumer-oriented stocks could be a beneficiary.


  • Employers are planning to cut roughly 62,000 jobs in April, citing falling oil prices as the main reason for the cuts. While cheap oil is beneficial to global growth in some ways, it does take a toll on energy-leveraged industries.
  • This week we heard Federal Reserve Chair Janet Yellen warn that equities are overvalued. Regardless of whether or not this statement is correct, it has certainly had an effect on market sentiment.
  • Looking at the week ahead, the U.S. Empire State manufacturing survey data is set to be released for the month of May. Since the previous data point was surprisingly weak, investors may want to monitor next week’s release with caution.
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The Economy and Bond Market

U.S. and European stocks rebounded on the monthly U.S. employment report after global markets slumped on uncertainty over the U.K. general election and Greece's future in the eurozone. U.S. Federal Reserve Chair Janet Yellen's comments about high valuations also eroded equity prices midweek. Bonds had a volatile week with the yield on the U.S. 10-year note closing out at 2.14 percent, down from an intra-week high of 2.24 percent.


  • The jobs report revealed that the labor market has started to heal after the weak showing in the first quarter. The April jobs report came in line with estimates, with job gains of 223,000 for the month versus the prior month’s tally of 85,000, which was revised lower from the original 126,000. After a recent run of weak economic readings, this is a very positive report for those who began to worry that the economy’s loss of momentum in the first quarter was more than just a temporary pause.
  • The unemployment rate went down one tick to 5.4 percent from 5.5 percent the month before, and down from 6.7 percent in April 2014. The professional and business services, health care and construction industries were big jobs producers in April, with oil and gas following the expected negative path and manufacturing little changed.
  • Eurozone retail purchasing managers’ index (PMI) recorded its highest reading in 10 months at 49.5 for April, up from 48.6 in March.


    • The U.S. trade deficit exploded in March to $51.4 billion, a six-year high. This was much more than the $41.7 billion economists expected, according to Bloomberg. It's the largest deficit since October 2008. The resolution of the West Coast port strikes led to a sharp rise in inbound cargo volumes. The surge in imports makes it likely that first-quarter GDP growth will be revised down to a modest contraction.
    • The labor force remains shrunken historically, and don’t blame it all on retired baby boomers. Even among Americans in their prime working-age years—25 to 54 years old—participation has dropped. The rate among that group stood at 80.9 percent in March. By comparison, it averaged 83.5 percent between 1990 and the late-2007 start of the recession. A rise in participation by this cohort is essential for a sustained economic recovery.

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  • U.S. government debt markets have been roiled recently by a sharp sell-off in German bunds. The yield on 10-year bunds closed at 0.59 percent on Thursday, up from an all-time low of 0.075 percent on April 20. This episode unsettled markets because German government bonds, like their U.S. counterparts, are widely viewed as ultra-safe. Sudden spikes raise concerns that the bonds’ value can fluctuate wildly even when there is relatively little market news, adding uncertainty to what has long been seen as a risk-free trade.

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  • Consumer optimism rose in April to 95.9, its second highest level since 2007. Moreover, the Sentiment Index recorded a higher average level during the past five months than any other time since May 2004. With next week’s May release, a continuation in this trend would be positive for economic momentum.
  • Greek Prime Minister Alexis Tsipras forecast a happy end to fraught negotiations with creditors on a cash-for-reform deal. The chairman of eurozone finance ministers also said talks were making progress. With a Greek loan repayment of 744 million euros due to the International Monetary Fund (IMF) on May 12, the announcement of a resolution would be a positive surprise to the markets.
  • The absence of wage pressure in the latest employment report suggests that the Federal Reserve will not be in a rush to take its long-awaited first step in raising short-term interest rates. Many experts once expected the Fed to move in June, but the consensus has recently shifted to September or beyond as the probable beginning of any gradual tightening effort by the central bank.


  • Applications for U.S. home mortgages fell last week as interest rates jumped. The Mortgage Bankers Association said its seasonally-adjusted index of mortgage application activity, which includes both refinancing and home purchase demand, fell 4.6 percent in the week ended May 1. Next week’s results are highly anticipated and a consecutive negative reading would create concern about the sustainability of the housing recovery.
  • The latest Empire State manufacturing survey widely disappointed, posting the first negative reading since December. If next week’s print disappoints, concerns that the first-quarter manufacturing slump was not simply weather-induced will once again flare up.
  • According to UBS, there are three signs that we are in a late stage of the U.S. credit cycle. First, corporate credit (particularly via the bond market) has come to dominate domestic credit after a prolonged period of robust corporate issuance during which households have de-levered. Overall this has resulted in a steady increase in the size of the private credit market relative to GDP. Second, credit quality has deteriorated and continues to do so as the number of lower quality credits coming to the primary market has increased. Third, illiquidity in the secondary high-yield market is worsening not just in energy, but also in industrials. These indicators point to a turn in the credit cycle, but it may take a trigger such as the Fed or a material slowdown in global growth to mark a definitive turning point.



Gold Market

For the week, spot gold closed at $1,188.38 up $9.79 per ounce, or 0.83 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, lost 1.54 percent. The U.S. Trade-Weighted Dollar Index lost 0.54 percent for the week.

Date Event Survey Actual Prior
May- 6 U.S. ADP Employment Change 200K 169K 189K
May- 7 U.S. Initial Jobless Claims 278K 265K 262K
May- 8 U.S. Change in Nonfarm Payrolls 228K 223K 126K
May- 13 China Retail Sales YoY 10.40% -- 10.20%
May- 13 German CPI YoY 0.40% -- 0.40%
May- 14 U.S. PPI Final Demand YoY -0.80% -- -0.80%
May- 14 U.S. Initial Jobless Claims 273K -- 265K


    • Gold traders were bullish for a second week on speculation a weaker dollar may support gold demand.
    • As the U.S. dollar has seen sustained retrenchment lately, the “smart money” is taking the bullish-dollar bets off, as CFTC data show the value of positive bets in the futures pits have fallen to four-month lows.

Dollar's Rally May Reverse
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  • Bullionvault’s Gold Investor Insight rose in April as clients added the most metal in 20 months.


  • Investors sold the most gold from bullion-backed funds in anticipation of this week’s employment report potentially showing stronger job growth.
  • Gold has posted three straight months of losses, the longest slump since December 2013. The latest payrolls report, which showed a net increase of 223,000 for April, added to recent pressure on gold.
  • Societe Generale deemed gold an unreliable hedge against geopolitical risk saying the metal’s performance in periods of regional military conflicts is mixed at best.


    • RBC published a piece looking at the next gold price cycle post an initial Fed rate hike. The firm retained a $1,250 per ounce price for 2015 in anticipation of a stronger price in the second half of the year. Further, RBC believes an initial Fed rate hike has already been priced into gold at $1,150 to $1,175. The firm also believes key Asian physical markets are likely to remain supportive, and that if the initial rate hike were to be pushed back into 2016 we would see a significant upward move in gold.
    • Did you think quantitative easing (QE) had ended? In spite of having “ended” QE in October of last year, the Fed has continued to purchase about $30 billion of securities per month in order to offset maturities and reinvestments and keep its balance sheet constant. Cornerstone Macro notes the Fed will face a sort of “balance sheet cliff” next year, whereby a lot of Treasury securities in its portfolio will start maturing (see top chart below). The Fed is very unlikely to go off such a cliff and it will most likely “reverse taper” the cessation of reinvestments. Note that the Fed’s portfolio of bonds maturing in 2017 and 2018 surges, as shown in the second chart below, which means that Fed purchases of Treasuries and MBS securities are likely to continue for a lot longer.

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  • According to BCA, gold-mining stocks can increase in value despite the price of gold remaining range-bound. Given current low gold prices, companies have been cutting costs, reducing debt and giving serious thought to improving their allocation of capital. This is leading to increased M&A activity among gold miners looking to acquire quality assets. These mergers should result in rationalization of production and deliver earnings growth to survivors.

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  • South Africa’s biggest mining unions are seeing who will blink first as pay talks with gold producers become the latest battleground for membership. Both the National Union of Mineworkers and its fastest growing rival, the Association of Mineworkers and Construction Union, are overdue in presenting their demands to companies including AngloGold Ashanti and Sibanye Gold. The trade union that submits its demands last may get an opportunity to meet or exceed the demands of the other or differentiate its demands.
  • Governments around the world are making it more difficult to save and transact with cash in their latest attempts to financially suppress their citizens. Their goal is to force citizens to deposit cash and charge interest as well as having total control over the money on deposit. In France, individuals will not be allowed to make cash payments exceeding 1,000 euros. Additionally, cash deposits and withdrawals totaling more than 10,000 per month will be reported to the anti-fraud and money laundering agency. Spain has prohibited cash transactions over 2,500 euros. In Sweden and Denmark the use of cash is being steadily eliminated. In Israel, individuals and businesses are still allowed to make small cash transactions, but eventually all transactions will be converted to electronic forms of payment.
  • The U.S. trade balance was much weaker than expected, with the deficit expanding to $51.4 billion in March from $35.9 billion. As a result of the weaker trade data, Bank of America Merrill Lynch has cut its Q1 GDP tracking estimate to -0.5 percent, down from 0.1 percent.

Energy and Natural Resources Market

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  • Construction materials stocks outperformed this week due to strong earnings reports from the group. The S&P Supercomposite Construction and Materials Index rose 3.58 percent this week.
  • Fertilizer stocks outperformed this week. The group was primarily boosted by news that Syngenta, an agribusiness that markets seeds and agrochemicals, rejected a takeover bid from Monsanto. The Bloomberg Leaders Fertilizers Index closed up 1.94 percent this week.
  • Clean energy stocks rallied this week, boosted by its close link to the technology space. The NASDAQ Clean Edge U.S. Liquid Series Index rose 1.66 percent this week.


  • Canadian energy stocks took a hit this week after the country elected the Alberta New Democratic Party (NDP). The Alberta NDP is a left-leaning party that intends to increase royalties and taxes on energy companies. The S&P/TSX Capped Energy Index fell 4.32 percent this week.
  • Domestic oil producers underperformed this week as investors took profits off the table. The S&P Supercomposite Oil & Gas Exploration & Production Index fell 3.08 percent this week.
  • Master Limited Partnership (MLP) stocks and dividend plays underperformed this week as the 10-year Treasury yield made a significant breakout. The Alerian MLP Infrastructure Index fell 2.8 percent this week.


  • U.S. crude oil inventories are expected to decline by nearly 4 million barrels next week, as producers continue to pull back on drilling activity and refineries ramp-up the production of summer gasoline blends ahead of the driving season.
  • According to research service Amber Waves, “U.S. agricultural exports to China doubled from 2008 to 2012, growing to more than $25 billion in annual sales. China surpassed Japan, Mexico and Canada to become the top export market for U.S. farm products. The share of U.S. agricultural exports destined for China rose from about 2-3 percent in the 1990s to 16-18 percent during 2012-14.”
  • The energy relationship between Russia and China will be a big part of discussions during President Xi Jinping’s visit to Moscow. Russian President Vladimir Putin’s recent support for a gas pipeline from East Siberia to China increases the chances that the two countries will sign new energy agreements, according to Senior Research Fellow Keun-Wook Paik at the Oxford Institute for Energy.


  • The outlook is weakening for Canadian oil-sands investment as Alberta’s new NDP government will no longer favor oil-sands development (including a royalties hike and stricter environmental policies). Amongst our coverage, Teck Resources’ Fort Hills and Frontier oil-sands projects in Alberta could be impacted with this change.
  • Saskatchewan, Canada’s biggest agricultural province, imposed a temporary ban last month on certain investors acquiring farmland. The government’s concern is that surging land values that are fuelled by pension-fund investment – while a boon to retiring growers – deters younger growers, boosts agricultural debt and threatens to create more tenant farmers.
  • The U.S. Department of Agriculture has confirmed outbreaks of the highly pathogenic H5N2 avian influenza virus on more than 100 Midwest farms since early March. Of the hardest hit has been Minnesota, the country's top turkey-producing state, along with Iowa, the number-one egg producer.

Emerging Markets


  • Hungarian equities outperformed this week as the central bank minutes revealed that policymakers are more dovish than expected. Furthermore, industrial production for the country came in much stronger than expected. The Budapest Stock Exchange Index closed up 0.58 percent this week.
  • Greek equities rallied this week as investors remain optimistic over the government’s ability to reach a resolution with its European counterparts. The Athens Stock Exchange General Index rose 1.95 percent this week.
  • This week Russian equities rose for the third straight week. It seems investors are becoming increasingly confident that the worst is over for the nation. The MICEX Index closed up 1.20 percent this week.


  • Chinese equities pulled back this week as investors locked in profits, ending an eight week rally for the A-shares market. The Shanghai Stock Exchange Composite Index fell 5.31 percent this week.
  • Thai stocks underperformed this week as the Asian economy struggles to recover after its contraction last year. The Thailand SET Index fell 1.06 percent this week.
  • This week South Korean equities retreated after the country’s finance minister stated that a weaker Japanese yen will hurt exports. The Korea Stock Exchange KOSPI Index fell 1.96 percent this week.


    • The Turkish lira’s real effective exchange rate has started to decline. Historically, the central bank has adjusted the policy rate to maintain the strength of the lira. Therefore, the fact that the real exchange is beginning to decline in response to the recent rate cuts provides an opportunity for the central bank to raise rates. Doing so should benefit the lira.

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    • Russia’s HSBC composite purchasing managers’ index (PMI) jumped above the 50 mark for the month of April. The unexpected strength of this data point shows that Russia’s economy may be recovering more quickly than anticipated.

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    • China’s April economic data to be released next week, especially industrial production, could remind investors of unfinished government policy tasks, particularly of further easing. This includes both monetary and fiscal, given the grimly anemic domestic demand trends revealed by a recent contraction in imports. From a full-cycle perspective, China’s ongoing bull market is likely halfway through, whether in price appreciation or valuation expansion, and therefore this week’s correction in the A-shares and H-shares markets should be viewed as opportunities for orderly accumulation.

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  • Brazil’s HSBC manufacturing PMI fell once again for the month of April as seen in the chart below. The three-month moving average reveals the significant weakness in the country’s economic prospects.

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  • With Greece and the rest of the eurozone still unsuccessful in coming to a resolution on the debt crisis, there remains considerable room for volatility in Greek markets in the near future.
  • Further contraction in Hong Kong’s March retail sales, especially for luxury items, might validate investors’ concern over a secular decline in tourist arrivals from mainland China. This is due to anticorruption movements and a preference of the Chinese middle class to travel farther from home. This could continue to weigh on investor sentiment towards Hong Kong retailers and Macau casinos.

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