Stocks Swoon Along With Gold And Oil But Keep Your Eye On Fed Rates

Poor earnings, plus sagging crude oil, and an extraordinary loss in a patent case in the biotech sector, weighed on equities prices today.

Stock prices, however, are trying to bounce back off their lows of the day, looking for a late afternoon session, which seems itself to be swooning.

European equities were mixed with the DAX and FTSE up a touch and the French CAC off a bit. While we still mourn the murdered in Brussels, the markets are going about their business. Asia was also mixed, but trended down (Nikkei and Hong Kong) while Shanghai was up modestly.

At 3:30 in New York, West Texas Intermediate crude is off over 4.00% and Brent North Sea product is down more than 3.00%. The reasons are clear-cut. The market was largely overbought recently and a rapid, unexpected build in stockpiles was the excuse traders were looking for.

The U.S. government reported a crude build three times above what analysts expected.

The increase marked the sixth straight week of record high inventories, rekindling worries of a glut that threatened to reverse the two-month-long, but tenuous, rally in the market.

The U.S. Energy Information Administration (EIA) said crude stockpiles rose 9.4 million barrels last week to a record total of 532.5 million barrels. Though this was not far off the 8.8 million build predicted by industry group American Petroleum Institute on Tuesday, it was light years away from the 3.1 million barrels expected by analysts in a Reuters poll.

"The data will do little to help oil bulls, given the monster build for crude inventories already at record high levels prior to this," said Chris Jarvis, analyst at Caprock Risk Management in Frederick, Maryland.

Aside from helping to depress oil, the U.S. dollar helped to push spot gold down around 2.25% today, although regular trading was negative enough all by itself. The remaining components of the precious metals complex – silver, platinum and palladium were down approximately 4.00% each. (At 4 PM in New York.)

We think the U.S. dollar is rising on the annoyingly persistent chatter of non-voting members of the Fed this year. Patrick Harker, President of the Philadelphia Fed, contradicting a statement that was issued a week ago said he thinks the next interest-rate increase could come as soon as April. Another non-voter, Chicago Fed President Charles Evans, said we still might see two more increases this year, which is softer than Harker’s outlook but still considered a hawkish statement.

The two officials are noted inflation hawks, but what everyone tends to forget is that 2% is an inflation target and an average. We fall in the camp that says 2.5% or even 3.00% may very well be the likely spot where inflation may settle briefly later this year before being squelched.

We also feel as if the FOMC will not act hastily because of the presidential elections.

Inflation in the United States in January was the strongest in January in almost 4-1/2 years and it ticked up more than anticipated in February.

You will hear more and more about the Fed purposely falling behind the inflation curve in the second quarter. Probably they are more concerned with fuller employment than they are with inflation. In and of itself more employment will tend to drive inflation as more wages chase goods.

We also believe we are not out of the woods with China’s economy just yet, so the Fed may be factoring that in as well.

The kibitzing by the non-voting Fed members on the 2016 FOMC is a pointless distraction. Pay attention to the big three who actually cast a vote: Chairwoman Janet Yellen; Vice Chairman William Dudley, and Stanley Fischer of the Board of Governors. Without them, nothing will change.

Wishing you as always, good trading,