Japan Slows Down, Oil Falls - Expect Weakness In The Markets This Morning

  • China is still worry, for one reason or another.
  • There's a set of tech and biotech stocks that is still hot.
  • Now the Japanese economy is contracting, oil prices could slide further.
  • In a bearish mood today, markets might also focus on the slowdown in Germany.
  • All combined, the bears could take the day, today.

China Wobbling - Stock Markets On Tenterhooks

Japan Slows Down, Oil Falls - Expect Weakness In The Markets This Morning

Last week we saw a whole spate of incidents centered around China, ranging from the Yuan devaluation, to the stabilization of the Chinese currency before the end of the week. However, the trading week starts today, with China still wobbling from another incident, the Tianjin disaster.

Americans looking for perspective should imagine the container port by the Houston Ship Channel, then put New York about where Houston is, just 100 miles distant. The death toll stood at 112 late yesterday, with 700 injured. Of course, there's the unquantifiable cost of human life, but that apart, there is the economic damage, the expense of putting things back together, and the cost of making safety improvements. Highly toxic sodium cyanide was reportedly found at the site on Sunday.

This can’t be good for China’s stock markets, and western analysts are losing faith in the government’s handling of that crisis as well. The Economist calls it “yuan thing after another.”

America Is Just OK, Or Thereabouts - Now Japan Slips Up

The U.S. market start off in OK shape, with the Dow Jones at 17,477, the S&P 500 at 2,091, and the NASDAQ at 5,048. These are not record levels, but the records are within striking distance with another strong rally. The markets staged a weak one Friday afternoon, once oil stopped trading, and it’s the oil price that will probably determine the direction on Monday as well.

Oil prices were due to start the week at $42.50 for West Texas Intermediate (WTI), the main U.S. grade. Meanwhile, the Japanese economy contracted, and U.S. producers continued to add drilling rigs for the fourth straight week, in spite of the recent slump in oil prices, to take the WTI below $42 a barrel. This weakness in oil prices that's begun over the U.S. weekend, will likely hurt sentiment, and the markets, when they open on Monday.

As for Brent, the main global grade was due to open at $49.03, with a spread of $6.50/barrel, as forecasters continue to take their estimates for a year-out lower, with it currently at $48/barrel.

That’s not enough for most U.S. exploration companies to make money. As a bunch, this group represents about $600 billion in high-interest loans, a default on which, some predict, could be the beginning of the next subprime crisis. The fear is that low commodity prices will cause a global stock market crash this fall.

The pain is now moving from the oil-patch to their supply chains, with General Electric (NYSE:GE)  sitting near the inventory levels it was at a year ago, having ditched most of its finance businesses to focus on energy and health.

Tech Stocks, Biotech Stocks - Still Hot

The hot sectors of the U.S. sector remain the same. The FANG stocks – Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX) and Google (NASDAQ:GOOG), remain strong, and while Apple (NASDAQ:AAPL) is only up 5% for the year its next big set of product announcements are now only a month away, scheduled for September 9.

Biotechs also remain hot, with companies like Allergan (NYSE:AGN), up 46% over the last year, and Celgene (NASDAQ:CELG), up 44%, leading the way. Technicals are getting stretched, however, and CVS (NYSE:CVS) Health fired a shot across their bow recently with a demand for lower prices on new cholesterol drugs and a refusal to cover two dozen name brand drugs, including Viagra, from insurance plans for which it’s the pharmacy benefit manager, Caremark.

The war between PBMs like CVS’ Caremark, Express Scripts (NASDAQ:ESRX) and Catamaran (NASDAQ:CTRX) on the one hand, and drug companies offering miracle cures on the other, is the story investors are going to have to monitor closely. The PBMs are putting their thumbs down on the price scale for insurers like United Health (NYSE:UNH), which itself is acquiring Catamaran, and the combinations of Anthem (NYSE:ANTM) - Cigna (NYSE:CI) and Aetna (NYSE:AET)  – Humana (NYSE:HUM). They all want to transform the U.S. health system into something more like the managed care found in Europe.

Doing that against the backdrop of a U.S. presidential election means we can expect more volatility ahead.

What To Expect From Stock Markets Today?

For now, as China continues to worry and the U.S. just about stabilizes, the focus may shift to Japan, Germany and falling oil prices. The sentiment is rather gloomy, and a fall in global markets shouldn't surprise investors today. Stay tuned for your daily dose of pre-market news in our stock market news daily titled Markets This Morning.

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