PLUNGING OIL HURTS COMMODITY-RELATED ASSETS AND COUNTRIES -- AND BOOSTS US BONDS AND STOCKS -- DAY'S WINNERS INCLUDE RETAILERS AND AIRLINES -- FALLING BOND YIELDS BOOST STAPLES AND UTILITIES
OPEC FAILURE TO CUT CAUSES OIL TO PLUNGE... Thursday's decision by OPEC not to cut oil output has caused that commodity to plunge in value, and has brought other commodities down with it. The weekly bars in Chart 1 show the United States Oil Fund (USO) plunging to the lowest level in more than five years. That has punished energy stocks which are down 6% today and the market's weakest sector. It has also hurt stocks in countries that export energy like Brazil, Canada, and Russia which are down sharply. Commodity currencies are also under pressure. The energy plunge has caused big losses in industrial and precious metals. Copper, gold, and silver are suffering big losses. Chart 2 shows the DB Commodities Tracking Index (DBC) falling to a new five-year low. That's also hurting basic material stocks. Plunging oil prices, however, are giving a boost to airlines and retailers which are having a strong day. Falling commodity prices are also giving a boost to bonds. That's helping consumer staples and utilities which benefit from falling bond yields. A stronger dollar is also putting downward pressure on commodity prices.
(click to view a live version of this chart)
Chart 1
(click to view a live version of this chart)
Chart 2
BONDS AND STOCKS ARE RALLYING TOGETHER ... Despite the plunge in energy and material stocks, the stock market help up pretty well. The Nasdaq and Dow are showing modest gains, while the S&P 500 has a small loss. The Nasdaq is the least impacted by falling oil prices. Within the Dow, big gains in Wal-Mart, Home Depot, and, Nike helped offset losses in Chevron and Exxon Mobil. Chart 3 shows the Dow closing slightly higher at today's early 1:00 close. The green line on top of Chart 3 shows Treasury bond prices rising as well. That's not surprising for a number of reasons. Falling oil prices are good for most stocks and are also good for bond prices which usually rise when commodities fall. The fact that European bond yields fell to record lows this week are also keeping a strong bid under Treasury prices. Bond and stock prices rising together also explains why economically-sensitive stock groups like retailers and transports are leading the market higher along with defensive stocks like consumer staples and utilities. The former group is getting a strong boost from falling oil and stronger consumer spending. The latter group (which pays dividends) is getting a boost from rising bond prices and falling yields.
(click to view a live version of this chart)
Chart 3
FALLING OIL MAKES FOR STRANGE SECTOR ALIGNMENTS ... The daily bars in Chart 4 show the Consumer Discretionary SPDR (XLY) gaining more than 1% today to lead the market higher. Most of those gains are coming from retailers. The solid line shows the Consumer Staples SPDR (XLP) also gaining more than 1%. The XLY is benefiting from falling oil prices, while the XLP is being helped by falling bond yields. Chart 5 shows the same phenomenon between transports and utilities. The solid line shows the Dow Jones US Airlines index climbing 7% today. Airlines are the biggest beneficiaries of falling oil. At the same time, the Dow Utilities (solid line) are up 1%. Dividend-paying utilities do better when bond prices are rising, and bond yields falling. It could be argued that the deflationary effect of falling oil prices is the main reason for all of those gains.
(click to view a live version of this chart)
Chart 4
