Stocks fell globally after one of the biggest earthquakes in history hit Japan overnight. The quake, which left hundreds dead, has done significant damage to the country’s infrastructure. The news rattled overseas investors, sending the Nikkei down sharply and most key international stock indexes down more than 1% as market participants assess potential economic disruption. Meanwhile, a slight uptick in Chinese inflation data also weighed on global sentiment, while the government’s measure of U.S. retail sales came in right in line with expectations and generated little reaction. U.S. crude is down about three dollars on Asian growth concerns and a quiet “Day of Rage” in Saudi Arabia.
Looking back at Thursday, stocks sold off sharply, “taking hits” from a number of directions. Initial pressure on equities stemmed from slowing Chinese export growth and European debt concerns. Then, higher jobless claims and a wider-than-expected U.S. trade deficit added to the market’s jitters while Middle East unrest continued to weigh on investors’ minds. A dip in oil prices provided little relief, although it helped Consumer Discretionary hold up relatively well. The resource sectors were hit hardest as commodity prices fell across the board by similar amounts as stocks. All S&P sectors finished in negative territory, with the defensive Telecom and Consumer Staples holding up best.
Around our financial planning firm this morning, we were discussing four items that we thought would be of particular interest to our readers:
U.S. families carried a smaller debt burden in 2010 than at any point in the previous six years, putting them in position to spend more. Total U.S. household debt, including mortgages and credit cards, fell for the second straight year in 2010 to $13.4 trillion, according to a Federal Reserve report. That level comes to 116% of disposable income, down from a peak debt burden of 130% in 2007, and the lowest debt level since the fourth quarter of 2004. The shrinking debt burden brings U.S. consumers, whose purchases make up about one-sixth of global demand, closer to the point where they can make a big contribution to the world-wide recovery.
The retail sales report for February was solid. Retail sales growth accelerated in February as weather improved and auto and gasoline sales surged. Overall, sales increased 1% from January, representing the strongest growth since October, while sales excluding autos and gasoline rose 0.6%. On a year-over-year basis, sales improved a solid 8.9% overall, and 5.1% excluding autos and gasoline. Improved weather helped support sales, while rising gasoline prices boosted gas station sales. The report is not likely to be market-moving, especially in light of the news out of Japan.
What is “backwardation” and why is it important? Backwardation refers to a downward-sloping futures curve. This occurs when near-term futures contracts are at higher prices than futures contracts further out along the curve. As ETF products “roll” their contracts as they near expiration, they purchase the cheaper contracts one month out which results in positive roll yield and can add value to the ETF. Backwardation in futures curves typically occurs in low inventory environments.
Oil trading swung violently on Thursday. In morning trading in New York, crude fell 4% to $100.62 a barrel on worries that slower economic growth would curb global demand. However, as reports of unrest in Saudi Arabia emerged, prices rebounded. Crude closed down 1.6% from a day earlier, but still up 12.4% from the start of the year. Saudi Arabia is the world’s largest oil exporter, accounting for 10% of the world’s crude-oil production.
As always, email me here with your questions or comments. I love to hear from you and thoroughly enjoy the “intellectual debate” with our clients and friends that these opinions generate.
Greg Powell, CIMA
Note: The opinions voiced in this material are for general information and are not intended to be specific advice. Any indices such as the S & P 500 can’t be invested into directly. Past performance is no assurance of a future result.
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