Morning Note - Strong US payroll data - stocks drop!

by James Gerrish 07 March 2011

** 07/03/11  - 8.46am  -  by James Gerrish** 

  • We had a great day on the local market Friday with the index adding +57 points or 1.2% to close at 4864.  We bounced well off the 4800 level which is an important point and buying intensified into the close - another positive. 
  • Unfortunately, this was not backed up by a positive session in the US on Friday with the DOW JONES down -88 points or -0.72% to close at 12169. 
  • This morning, SPI FUTURES were pricing in a fall of -28 points when trading kicks off this morning. 
  • We saw a host of data out last week the most notable of which was the employment  number in the US. This came out just before market open and showed that +192,000 jobs were created in February pushing the unemployment rate to 8.9%. See CHART of Non-Farm Payrolls
  • This was inline with expectations and a great result.
  • You can clearly see the trend is starting to go in the right direction albeit in a fairly choppy print. 
  • We're certainly getting some volatile and choppy price action out of the US with a rise in the price of Oil overshadowing the employment number on Friday – this is normal in a consolidation phase. 
 
  • Oil seems to be the main game in town at the moment which although hard to argue with, seems to be driven by fear of Middle East tensions spreading into other countries (the main issue is Saudi Arabia)
  • As is stands, tensions is Libya have significantly reduced that countries output of Oil but when you look at the numbers, it’s not material in the context of the regions output. 
  • Libya produces about 1.6 million barrels per day (mbd) (2% of global production) and this has dropped to about 750,000 bd since the unrest began. 
  • Saudi Arabia is the main producer in the region with output of about 9 mbd
  • The market has fears that social unrest may spread to Saudi Arabia and this would have a significant impact of supply (true) 
  • However social unrest generally starts from economic hardship and unlike some of the poorer Middle East nations, the Saudi's (in general ) have not had much to complain about.
  • Another important consideration is the broader trend in supply - which according to OPEC is sitting with excess production capacity of 5.2 mbd. 
  • This is comforting and suggests that even though there is a threat of further disruptions to supply of the Oil OPEC has the capacity to increase production.
  • I continually here that Oil is going back to $150 a barrel or even $200 a barrel - it may do however we’ll need to see a sharp reduction in the ability of the region to produce Oil which will eat into the excess capacity. 
  • When Oil peaked at $145 a barrel in July 2008, spare production capacity was sitting at 1.4 mbd compared to 5.2 mbd as it currently stands.
  • Obviously there is going to be an increase in physical demand for Oil as the global economy recovers.
  • We saw evidence of this last year with demand picking up by 3.5% (expected to be 1.7% this year) so there are some demand side pressures but at the moment, supply is well and truly able to meet this trend. 
  • Its important not to get caught up in the media hype which loves a story about Crude – we just need to keep an eye on the facts.
  • CHART OF OIL
James Gerrish 
(02) 9375 0117

Disclaimer

James Gerrish is an Authorised Representative (Rep No. 352904) of Shaw Stockbroking Limited ("Shaw Stockbroking"). Shaw Stockbroking is a holder of Australian Financial Services Licence No 236048. Shaw Stockbroking, its directors, officers, associates and employees each declare that they, from time to time, may hold interests in financial products and/or earn brokerage, commission, fees or other benefits from financial products mentioned in this e-mail or attached documents. Unless specifically stated within this page or an attached document, any information communicated by this e-mail constitutes unsolicited general financial product advice which has been compiled without regard to any investor's individual objectives, financial situation or needs. It is not specific advice for any particular investor. Before making any decision about the information provided, you need to consider the appropriateness of this information having regard to your individual objectives, financial situation and needs and consult your adviser. Any indicative information and assumptions used here are summarised and also may change without notice to you, particularly if based on past performance or relate to a future matter.
 

Subscribe to our Daily Newsletter?

Would you like to receive our daily news to your inbox?