Markets are watching Yellen not Putin

By Phil Flynn

Forget Crimea and bring on the Fed. While Vladimir Putin mocks President Obama it seems that the markets want to forget about those risks and focus on the Fed and whether or not Janet Yellen can be tougher than the President.  Janet’s first job is trying to rephrase the Fed's 6.5% jobs target and to send a signal that it is just not about a number but about a slew of data. We all know that the Fed had previously indicated  that the unemployment rate would need to go down to  6.5% before they would even think about raising interest rates, but that rate is far from sufficient in an economy where the jobs that are being created are a far cry from the jobs that were lost.

Stocks rallied hard after a big rebound in industrial production that perhaps indicated that the weakness we saw was energy related. Factories that had to interrupt their natural gas slowed production and now are playing catch up.  While the market hopes this is a trend but it will assure us that the Fed will not waver from the taper.

We know it will be tough to back off the $10 billion dollar taper but the real challenge may come when it is the right time to raise interest rates. Even more important may be when the Fed starts unwinding its ever growing balance sheet.

Of course the Fed should start to admit that there are consequences to their actions and yes tapering is a form of tightening. If you don't believe it, talk to the emerging markets who feel like the Federal Reserve left them hanging out to dry. As I have said before it seems the first steps in removing extraordinary stimulus may not be so painless after all. The global economies tried to keep a stiff upper lip but now is feeling pain as the Band-Aid starts to get ripped off.

The Federal Reserve's failure to acknowledge the emerging markets in its statement is hurting some feelings and some emerging market balance sheets. The Fed also failed to acknowledge that quantitative easing caused the emerging markets to blow bubbles and live beyond their means now have to deal with a world post hot money. Instead of dealing with the massive inflows as the United States started to deleverage, they now have to deal with the outflows unmasking the ramifications of being the Fed's economic dumping ground. Now the question is whether or not the Fed can continue to ignore the turmoil in the emerging markets and rely on our own rebounding economy or will it come back to haunt us.

China of course is a reason why oil is faltering.  Oil was getting weighed down led by RBOB and a rise in refining margins. OPEC is producing like crazy and wants to hang onto market share and maybe develop new customers that are being held hostage to a country that is using its energy advantage as a weapon to invade its neighbors.

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Jump in rig count should be a positive for jobs

by SoberLook.com

In another sign of improving momentum in the US economy, the active oil and gas rig count started rising in recent weeks. This is after a major decline in 2012 and a stagnant 2013.

Source: Baker Hughes

A big part of the drop in 2012 was due to the sharp decline in natural gas prices. Production in certain situations became unprofitable - particularly for some of the more leveraged projects.

Source: barchart

Now that gas prices have firmed up and likely to stay that way (see post), some of the extraction projects make sense again - especially as technology improves. Should conversion from gas to liquids become less expensive (see story), rig count will increase further.
Like it or not, oil and gas jobs tend to be high-paying - which should help with US wage stagnation. The industry also generates a decent job multiplier effect through the various peripheral sectors that support it (housing, manufacturing, transportation, etc.) If sustained, this jump in rig count could therefore provide a meaningful contribution to the US economic expansion.

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Deteriorating US wheat faces further cold, dryness

by Agrimoney.com

US winter wheat seedlings, whose condition deteriorated further last week, face yet further tests from poor weather, including "truly impressive" cold and "way below normal" precipitation prospects.

US Department of Agriculture scouts overnight revealed a further decline in the condition of winter wheat last week in the southern Plains, the main area for growing hard red winter wheat used mainly in making bread.

In Kansas, the country's top wheat-growing state, the proportion of seedlings in "good" or "excellent condition fell by 3 points to 34% in the week to Sunday, as crops again faced "windy conditions and limited precipitation".

"Available soil moisture continued to be a concern going into the spring," USDA scouts said.

While Kansas wheat is in better condition than a year ago, when the US was still recovering from the 2012 drought and the proportion of crop rated good or excellent was at 29%, the average for mid-March in the previous five years is 46%.

'Wildfires a major concern'

In Oklahoma, where the proportion of the state seen as suffering drought rose 18 points to 81% in the week to March 11, the amount of winter wheat rated as good or excellent by dropped four points to 18% in the week to Sunday.

"Due to warmer weather, dry air and high winds, wildfires were a major concern," USDA scouts said.

In Texas, the proportion of wheat placed in the top two bands slumped by 15 points to 13%. Even though the week-before figure was seen as anomalous, the rating is 2 points lower than on March 3.

And in Colorado, wheat was rated at 35% good or excellent, down 8 points over two weeks.

"There were reports of high winds last week with localised damage to winter wheat."

'Moisture shortages will build'

The ratings come at a critical time for seedlings, which are beginning to emerge from dormancy, increasing their needs for moisture to power crop development.

"As winter wheat emerges from dormancy, much of the hard red production area has seen less than 0.5 inches of rain in March," Mark Welch at Texas A&M University said.

However, the forecast for the next 5 to 7 days "calls for dry conditions to continue".

Weather service MDA said that "moisture shortages will continue to build across the central and southern Plains as rains remain very limited there through the next 10 days," adding that "dryness will also expand across the southern Midwest".

'Truly impressive'

At WxRisk.com, David Tolleris forecast a "truly impressive" cold temperature anomaly in the six-to-10 day outlook.

"There are no other ways to describe this outbreak of cold air coming," he said.

"Obviously it's not going to be as cold as what we would see in January or early February but relative to normal the blast of cold air coming in on all the models in the six-to-10 day looks pretty darn impressive."

And this cold weather bodes ill for rainfall hopes too.

"Not surprisingly with this sort of pattern, it's very hard to get any sort of moisture across any portion of the Plains and the Midwest, so the precipitation anomalies look way below normal as well."

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To Tell the Truth Tuesday for Gold & Silver?

by Chris Kimble

CLICK ON CHART TO ENLARGE

2014 has been kind to Gold, as its up over 13% in less than 90 days. What has this rally proven when it comes to the big picture for Gold?

The above chart reflects that in the past 9-months, gold looks to be chopping back and forth. In the bigger picture, Gold looks to be inside of a large falling channel, hitting support of this channel 9-months ago and now its hitting falling resistance.

Could we look to Silver for some answers? A month ago I shared with Premium and metals members that the Power of the Pattern reflected that Silver looks to have formed a bearish descending triangle and the downside looks incomplete. Should that pattern complete itself, Silver could fall as much as 30% from here (Silver decline)

Tell the Truth Tuesday....Gold and Silver are both facing key resistance lines, to change the big picture trend, they need to break these resistance lines!

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EU Country Exposures to Russia--The Rise of France

by Marc Chandler

This Great Graphic was posted on Bruegel in a post by Silvia Merler   Based on BIS data from September, it shows how the EU banks'  $156 bln of exposure to Russia is distributed among the various countries.   French banks alone account for nearly a third ($51 bln).  Italy is second with roughly $28.5 bln exposure and Germany with almost $24 bln.  UK banks have $19 bln of exposure to Russia and Dutch banks have about $17.5 bln.    Of note, and importantly, the Austrian bank exposures are not available for the last few quarters.  BIS data suggests US bank exposure to Russia is about $40 bln.
Merler notes that the BIS data may not be comprehensive and tries to complement with a review of work by EIU and other economists and journalists.  Austrian, French and Italian bank exposures may be greater than the BIS data suggests, in part due to local operations. 

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Should Investors Worry About Crimea?

By Dave Moenning

It is clear that the focus of the stock market remains squarely on the geopolitical situation in Ukraine/Crimea/Russia (NYSE: RSX). What is not quite so clear is why this actually matters to traders.

Before we go any further on this topic, let me first state that this missive is not a pontification on the expertise of the politics of Russia, Ukraine or Crimea. Heck, we struggle to keep up with the shenanigans that occur in Washington, D.C. However, when the stock market's focus turns to a specific topic, it is important for investors of all shapes and sizes to try and understand what is going on, and why.

The overall objective at times like these is to try and make sense of whatever is driving the action. To be honest, traders don't really care whether Crimea stays with Ukraine or becomes a Russian state. However, what traders do care about is whether or not the situation in Crimea will turn the current pullback into something more meaningful.

In looking at the recent action the first question is, why are traders selling? With all the talk of referendums, troop movements and economic sanctions going on last week, it wasn't exactly a surprise that traders decided to avoid the potential "weekend headline risk" by doing some selling into Thursday/Friday.

However, traders should also keep in mind that stocks came into last week at all-time highs, that the indices were overbought, and that sentiment was becoming overly optimistic. Therefore, a pullback of 1.96 percent - for any reason - isn't exactly a cause for alarm.

So, other than the fact that stock prices have been pushed down a bit, it's unsure that the situation in Crimea is worthy of the "crisis" label being applied currently. Sure, people could be concerned that the powers-that-be in Washington might do something stupid and wind up fighting another war. But seriously folks, isn't this an outlier possibility? After the political mess that was created by picking a fight in Iraq and Afghanistan, does anybody really think a war over a pipeline in Crimea is the likely outcome here?

Just The Facts Ma'am

Let's look at some of the facts of the situation. On Sunday, a referendum was held in Crimea asking citizens if they would like to come under Russia's flag. In essence, the Crimean's were taking a vote on whether or not to secede from Ukraine.

To be sure, the outcome of the vote was expected to go Russia's way. However, exit polls showed that 95.5 percent of voters favored joining Russia over staying part of Ukraine. And running contrary to the West's contention that people were being forced to vote this way, voter turnout was 79 percent. Which, by the way, was higher than ANY Presidential election in the United States since 1900.

As expected, the U.S., the U.K., and the Eurozone object to this whole thing, contending that the vote in Crimea would be rigged and that it violates international law. Cue the sternly worded statements of contempt, the threats of sanctions, and the resolutions in the U.N. Yep, we've all seen this movie before.

On that score, we received the following note on Wednesday last week from someone who actually is an expert on this stuff:

I know far less than any of you about the stock market per se. My background is in Russian history. Here is what I do know: the Crimea situation will continue to be serious for at least a few weeks, possibly escalating into the next few months... There's a 100% guarantee of that Crimea's lawmakers won't budge and that the referendum will go through on Sunday. Ukraine will probably declare the referendum null and void before Sunday and may formally dissolve the Crimean parliament from afar, but that will change nothing on the ground.

On Sunday, Crimea's residents will vote with a virtual guarantee that the referendum will pass. Ukraine will scream but do nothing. The West will issue a lot of stern warnings. The ball will now be in Russia's court. Odds are high that Russia will vote to formally annex Crimea or do something very close to that in essence. This may happen as early as next Monday. The West will make even more noise. In short: expect Crimea to dominate the news between Friday and Tuesday. I don't know if this is enough to trigger a correction, but I can assure you that my short positions in East Europe are doing well.

What Do The Charts Say?

As has been written a time or two already this year, one of the best ways to tell if you've got a real crisis on your hands is to listen to the message from the charts. So, let's briefly review the action on a few key indices and see what we see.

S&P 500 Daily

Although there is a lot of concern and teeth gnashing about the situation in Crimea, traders will have to admit that the chart of the S&P 500 (NYSE: SPY) still looks pretty darned good. One take is that unless the February low is taken out, the bulls can say they remain large and in charge. This doesn't mean that things won't get nasty here or there. But, again, from a big-picture, simplistic standpoint, there doesn't appear to be much to worry about at the moment.

VIX Weekly

Speaking of fear, the chart of the VIX (NYSE: VXX) really tells the story nicely. In this weekly chart, you can clearly see what real fear (i.e. a real crisis) looks like. Since 2011, the spikes in the VIX have declined as the various crises that cropped up weren't really a big deal and wound up fizzling fast. And since the middle of 2013, a weekly close above 19 appears to be the line in the sand determining what is or isn't a crisis. And while the VIX has spiked, the move does not yet appear to qualify as a reason to panic.

10-Year Note Yields Daily

The same can be said for the action in the government bond market. While the chart of the 10-year note yield (NYSE: IEF) does appear to present a double top, it is also clear that rates are not diving at the present time. And if we did indeed have a crisis on our hands, rates would be moving down - and fast. Therefore, traders should look for a break below 2.50 percent as a sign that something serious could be occurring.

The Bottom Line

As the expert on Russia wrote, the situation in Crimea could certainly remain a focus for a while. And threats to sell U.S. bonds or retaliate against sanctions could indeed cause the algos to lean to the sell side.

However, so far at least, investors who don't trade on a millisecond basis may be better off focusing on other things such as the bond default and/or growth issues in China, the upcoming Fed meeting, or the U.S. economic data. Because from where most sit, all might be better uses of time.

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