Oil (New York Mercantile Exchange: @CL.1) dropped below $80 per barrel on Monday morning, with important implications for production and jobs.
The most important issue for the markets is oil that dips below $80. Today, Goldman Sachs (GS) cut its West Texas Intermediate Crude target to $75 from $90. The investment bank also cut Brent (Intercontinental Exchange Europe: @LCO.1) crude to $85 from $100.
A few weeks ago Citi (NYSE:C)
put out a report noting that the "full-cycle" costs (land,
infrastructure, well drilling and operating costs) for many new shale
plays is in the $70 to $80 range. That means that we are entering the
area where some new shale plays will become unfeasible.
This has a bigger impact than just lower oil gas prices. Obviously, a
lower gas price is good news. The bad news is the potential impact this
could have on the other side of the ledger: jobs. The shale oil boom has
been a significant help for the jobs market in the United States. A
reduction in new drilling could have a significant impact on the booming
energy industry.
Elsewhere:
1) Seasonal traders on alert: the S&P 500 (CME:Index and Options Market: .INX) had its best week since January 2013 last week, as inflows combined with under-exposed hedge funds moved the markets up.
Traders are generally
optimistic, since we are entering a seasonally strong period for several
reasons: the November-December two-month period is seasonally strong,
trade during the six days before midterm elections has been up 75
percent of the time in the eight elections in the last 32 years, and
companies that halted or reduced buybacks in October return to the
market in November.
2) Lots of international news:
Brazil's Bovespa is being hit hard as incumbent Dilma Rousseff
won a hard-fought re-election battle; 51.6 percent of the vote went to
her versus 48.4 for the challenger Aecio Neves. The Dilma victory was
obviously not priced into the market.
Of the 24 European banks that failed the stress test, nine were Italian. Greece only had three, Cyprus also had three.
The Nikkei 225 (CBOE:.NKXQ)
was up 0.6 percent overnight after a Japanese government official said
the government should consider delaying a planned sales tax increase.
This would follow on the heels of a similar hike in April.
3) While everyone will be fixed on the Fed meeting this Wednesday, many
are talking just as much about the first look at third quarter GDP on
Thursday. Consensus is for a gain of 3.1 percent. It was 4.6 percent in
the second quarter, so if the third quarter reading hits the consensus
we will definitely be in a period of above-trend GDP growth.
4) How important is a 10-percent correction? Financial journalists
obsessed about this last week as we got close to a 10-percent decline,
but it may not be indicative of much at all. Steven Wieting, global
chief investment strategist with Citi Private Bank, writing in Barron's
this weekend, noted that "moderate asset price declines have more often
been false warning signs."
He said fundamentals and stocks rarely part ways for long, and that
corrections not associated with recession have been much shorter in
duration. Since 1950, the U.S. stock market has seen 29 discrete
declines of 10 percent or more, but only 10 recessions, Wieting notes.
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