Retail Sales For June Provide An Early Boost, But Bond Yields Mostly Calling The Shots

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The first week of earnings season wraps up with major indices closely tracking the bond market in Wall Street’s version of “follow the leader.” Earnings absolutely matter, but right now the Fed’s policies are maybe a bigger influence. In the short-term the Fed is still the girl everyone wants to dance with.

Lately, you can almost guess where stocks are going just by checking the 10-year Treasury yield, which often moves on perceptions of what the Fed might have up its sleeve. The yield bounced back from lows this morning to around 1.32%, and stock indices climbed a bit in pre-market trading. That was a switch from yesterday when yields fell and stocks followed suit. Still, yields are down about six basis points since Monday, and stocks are also facing a losing week.

It’s unclear how long this close tracking of yields might last, but maybe a big flood of earnings due next week could give stocks a chance to act more on fundamental corporate news instead of the back and forth in fixed income. Meanwhile, retail sales for June this morning basically blew Wall Street’s conservative estimates out of the water, and stock indices edged up in pre-market trading after the data.

Headline retail sales rose 0.6% compared with the consensus expectation for a 0.6% decline, and with automobiles stripped out, the report looked even stronger, up 1.3% vs. expectations for 0.3%. Those numbers are incredibly strong and show the difficulty analysts are having in this market. The estimates missed consumer strength by a long shot. However, it’s also possible this is a blip in the data that might get smoothed out with July’s numbers. We’ll have to wait and see.

Caution Flag Keeps Waving

Yesterday continued what feels like a “risk-off” pattern that began taking hold earlier in the week, but this time Tech got caught up in the selling, too. In fact, Tech was the second-worst performing sector of the day behind Energy, which continues to tank on ideas more crude could flow soon thanks to OPEC’s agreement.

We already saw investors embracing fixed income and “defensive” sectors starting Tuesday, and Thursday continued the trend. When your leading sectors are Utilities, Staples, Real Estate, the way they were yesterday, that really suggests the surging bond market’s message to stocks is getting read loudly and clearly.

This week’s decline in rates also isn’t necessarily happy news for Financial companies. That being said, the Financials fared pretty well yesterday, with some of them coming back after an early drop. It was an impressive performance and we’ll see if it can spill over into Friday.

Energy helped fuel the rally earlier this year, but it’s struggling under the weight of falling crude prices. Softness in crude isn’t guaranteed to last—and prices of $70 a barrel aren’t historically cheap—but crude’s inability to consistently hold $75 speaks a lot. Technically, the strength just seems to fade up there. Crude is up slightly this morning but still below $72 a barrel.

Losing Steam?

All of the FAANGs lost ground yesterday after a nice rally earlier in the week. Another key Tech name, chipmaker Nvidia (NVDA), got taken to the cleaners with a 4.4% decline despite a major analyst price target increase to $900. NVDA has been on an incredible roll most of the year.

This week’s unexpectedly strong June inflation readings might be sending some investors into “flight for safety” mode, though no investment is ever truly “safe.” Fed Chairman Jerome Powell sounded dovish in his congressional testimony Wednesday and Thursday, but even Powell admitted he hadn’t expected to see inflation move this much above the Fed’s 2% target.

Keeping things in perspective, consider that the S&P 500 Index (SPX) did power back late Thursday to close well off its lows. That’s often a sign of people “buying the dip,” as the saying goes. Dip-buying has been a feature all year, and with bond yields so low and the money supply so huge, it’s hard to argue that cash on the sidelines won’t keep being injected if stocks decline.

Two popular stocks that data show have been popular with TD Ameritrade clients are Apple (AAPL) and Microsoft (MSFT), and both of them have regularly benefited from this “dip buying” trend. Neither lost much ground yesterday, so if they start to rise today, consider whether it reflects a broader move where investors come back in after weakness. However, one day is never a trend.

Reopening stocks (the ones tied closely to the economy’s reopening like airlines and restaurants) are doing a bit better in pre-market trading today after getting hit hard yesterday.

In other corporate news today, vaccine stocks climbed after Moderna (MRNA) was added to the S&P 500. BioNTech (BNTX), which is Pfizer’s (PFE) vaccine partner, is also higher. MRNA rose 7% in pre-market trading.

Strap In: Big Earnings Week Ahead

Earnings action dies down a bit here before getting back to full speed next week. Netflix (NFLX), American Express (AXP), Johnson & Johnson (JNJ), United Airlines (UAL), AT&T (T), Verizon (VZ), American Airlines (AAL) and Coca-Cola (KO) are high-profile companies expected to open their books in the week ahead.

It could be interesting to hear from the airlines about how the global reopening is going. Delta (DAL) surprised with an earnings beat this week, but also expressed concerns about high fuel prices. While vaccine rollouts in the U.S. have helped open travel back up, other parts of the globe aren’t faring as well. And worries about the Delta variant of Covid don’t seem to be helping things.

Beyond the numbers that UAL and AAL report next week, the market may be looking for guidance from their executives about the state of global travel as a proxy for economic health. DAL said travel seems to be coming back faster than expected. Will other airlines see it the same way? Earnings are one way to possibly find out.Even with the Delta variant of Covid gaining steam, there’s no doubt that at least in the U.S, the crowds are back for sporting events.

For example, the baseball All-Star Game this week was packed. Big events like that could be good news for KO when it reports earnings. PepsiCo (PEP) already reported a nice quarter. We’ll see if KO can follow up, and whether its executives will say anything about rising producer prices nipping at the heels of consumer products companies.

Confidence Game: The 10-year Treasury yield sank below 1.3% for a while Thursday but popped back to that level by the end of the day. It’s now down sharply from highs earlier this week. Strength in fixed income—yields fall as Treasury prices climb—often suggests lack of confidence in economic growth.

Why are people apparently hesitant at this juncture? It could be as simple as a lack of catalysts with the market now at record highs. Yes, bank earnings were mostly strong, but Financial stocks were already one of the best sectors year-to-date, so good earnings might have become an excuse for some investors to take profit. Also, with earnings expectations so high in general, it takes a really big beat for a company to impress.

Covid Conundrum: Anyone watching the news lately probably sees numerous reports about how the Delta variant of Covid has taken off in the U.S. and case counts are up across almost every state. While the human toll of this virus surge is certainly nothing to dismiss, for the market it seems like a bit of an afterthought, at least so far. It could be because so many of the new cases are in less populated parts of the country, which can make it seem like a faraway issue for those of us in big cities. Or it could be because so many of us are vaccinated and feel like we have some protection.

But the other factor is numbers-related. When you hear reports on the news about Covid cases rising 50%, consider what that means. To use a baseball analogy, if a hitter raises his batting average from .050 to .100, he’s still not going to get into the lineup regularly because his average is just too low. Covid cases sank to incredibly light levels in June down near 11,000 a day, which means a 50% rise isn’t really too huge in terms of raw numbers and is less than 10% of the peaks from last winter. We’ll be keeping an eye on Covid, especially as overseas economies continue to be on lockdowns and variants could cause more problems even here. But at least for now, the market doesn’t seem too concerned.

Dull Roar: Most jobs that put you regularly on live television in front of millions of viewers require you to be entertaining. One exception to that rule is the position held by Fed Chairman Jerome Powell. It’s actually his job to be uninteresting, and he’s arguably very good at it. His testimony in front of the Senate Banking Committee on Thursday was another example, with the Fed chair staying collected even as senators from both sides of the aisle gave him their opinions on what the Fed should or shouldn’t do. The closely monitored 10-year Treasury yield stayed anchored near 1.33% as he spoke.

Even if Powell keeps up the dovishness, you can’t rule out Treasury yields perhaps starting to rise in coming months if inflation readings continue hot and investors start to lose faith in the Fed making the right call at the right time. Eventually people might start to demand higher premiums for taking on the risk of buying bonds. The Fed itself, however, could have something to say about that.

It’s been sopping up so much of the paper lately that market demand doesn’t give you the same kind of impact it might have once had. That’s an argument for bond prices continuing to show firmness and yields to stay under pressure, as we’ve seen the last few months. Powell, for his part, showed no signs of being in a hurry yesterday to lift any of the stimulus.

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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I am Chief Market Strategist for TD Ameritrade and began my career as a Chicago Board Options Exchange market maker, trading primarily in the S&P 100 and S&P 500 pits. I’ve also worked for ING Bank, Blue Capital and was Managing Director of Option Trading for Van Der Moolen, USA. In 2006, I joined the thinkorswim Group, which was eventually acquired by TD Ameritrade. I am a 30-year trading veteran and a regular CNBC guest, as well as a member of the Board of Directors at NYSE ARCA and a member of the Arbitration Committee at the CBOE. My licenses include the 3, 4, 7, 24 and 66.

Source: Retail Sales For June Provide An Early Boost, But Bond Yields Mostly Calling The Shots

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Critics:

Retail is the process of selling consumer goods or services to customers through multiple channels of distribution to earn a profit. Retailers satisfy demand identified through a supply chain. The term “retailer” is typically applied where a service provider fills the small orders of many individuals, who are end-users, rather than large orders of a small number of wholesale, corporate or government clientele. Shopping generally refers to the act of buying products.

Sometimes this is done to obtain final goods, including necessities such as food and clothing; sometimes it takes place as a recreational activity. Recreational shopping often involves window shopping and browsing: it does not always result in a purchase.

Most modern retailers typically make a variety of strategic level decisions including the type of store, the market to be served, the optimal product assortment, customer service, supporting services and the store’s overall market positioning. Once the strategic retail plan is in place, retailers devise the retail mix which includes product, price, place, promotion, personnel, and presentation.

In the digital age, an increasing number of retailers are seeking to reach broader markets by selling through multiple channels, including both bricks and mortar and online retailing. Digital technologies are also changing the way that consumers pay for goods and services. Retailing support services may also include the provision of credit, delivery services, advisory services, stylist services and a range of other supporting services.

Retail shops occur in a diverse range of types of and in many different contexts – from strip shopping centres in residential streets through to large, indoor shopping malls. Shopping streets may restrict traffic to pedestrians only. Sometimes a shopping street has a partial or full roof to create a more comfortable shopping environment – protecting customers from various types of weather conditions such as extreme temperatures, winds or precipitation. Forms of non-shop retailing include online retailing (a type of electronic-commerce used for business-to-consumer (B2C) transactions) and mail order

How Will Pumped Hydro Energy Storage Power Our Future?

Pumped storage hydropower has proven to be an ideal solution to the growing list of challenges faced by grid operators.

As the transition to a clean energy future rapidly unfolds, this flexible technology will become even more important for a reliable, affordable and low carbon grid, write IHA analysts Nicholas Troja and Samuel Law.

“Anything that can go wrong will go wrong”. That old adage, Murphy’s law, must seem appropriate for many power grid operators in 2020.

This year has tested the safe running and reliability of grids around the world like few others. Often termed ‘the biggest machine ever built,’ managing a power system, involving the coordination of complex and instantaneous interactions, is a formidable task at the best of times.

With the impacts of the Covid-19 pandemic on top of extreme weather events, greater penetrations of variable renewables and increasingly aged thermal assets, the task has only become more demanding in many markets.

These challenges have brought into sharp focus the growing need for energy storage, such as that offered by pumped storage hydropower.

Recent events highlight the need for pumped storage

Covid-19 continues to have an extraordinary impact on electricity markets. During the height of worldwide lockdowns, with large sections of the economy shutdown or greatly impaired, electricity demand declined by up to 30 per cent in some countries across Europe and in India.

As Fatih Birol, Executive Director of the International Energy Agency (IEA) stated, the demand drop “fast forwarded some power systems 10 years into the future” regarding integrating higher percentages of variable renewable energy (VRE) which receive priority dispatch to the grid. Managing periods of such low demand can create “significant operational risks” for grid operators. In some markets, this has led to curtailing, or shutting down, wind and solar facilities to stabilise the grid.

During such periods, pumped storage hydropower, with its ability to both store and generate large quantities of energy over long periods, was the first port of call for those grid operators lucky enough to have such stations on hand. In Britain, its four pumped storage stations were hailed by the Financial Times newspaper as the “first line of defence in the battle to keep Britain’s lights on”. Able to increase system demand by pumping water back up to their upper reservoir, pumped storage is a more cost-effective way of managing the grid than paying operators to curtail variable supply.

In August, the U.S. state of California experienced rolling blackouts for the first time since 2001 due to a combination of record heatwaves driving up demand, faltering gas-fired stations and a lack of dispatchable generation. As Stephen Berberich, President of the California Independent System Operator (CAISO) said, “we thought there would be adequate power to supply the demand…we were wrong” and the costs to the Californian economy will be significant.

These managed blackouts provide yet another wake-up call for policymakers on the need to appropriately plan for a zero-emissions future. With limited balancing resources such as pumped storage, California’s grid did not have the flexibility to shift sufficient generating capacity to the evenings when the sun had set yet the demand remained high.

Given California’s aim of reaching 100 per cent clean electricity by 2045, mainly from wind and solar power which currently accounts for 20 per cent of generation, significant investment in flexible, low carbon balancing resources will be required.

In response, California is betting big on batteries for short-duration storage, from sub-seconds to up to four hours, to manage intraday variations in net load. However, with those high levels of VRE on the grid, long-duration storage, which can discharge for 10 hours or more at rated power, will be needed to accommodate the seasonal patterns of VREs. It will do so by shifting generation over days, weeks and months of supply and demand imbalance. This is a story that rings true for many countries across the world with ambitious climate targets.

Achieving California’s clean energy target is made even harder by the government’s decision to classify conventional hydropower stations greater than 30 MW as a non-renewable resource under its Renewables Portfolio Standard. This arbitrary classification is at odds with international consensus and penalises the state’s oldest source of affordable, flexible and low-carbon electricity.

Figure 1: Illustration of a closed-loop (off-river) pumped storage station and how it can be used support VRE.

Capabilities of pumped storage

With a total installed capacity of nearly 160 GW, pumped storage currently accounts for over 94 per cent of both storage capacity and stored energy in grid scale applications globally. This has earned pumped storage its name as the world’s “water battery”. It is a mature and reliable technology capable of storing energy for daily or weekly cycles and up to months, as well as seasonal applications, depending on project scale and configurations.

Pumped storage operates by storing electricity in the form of gravitational potential energy through pumping water from a lower to an upper reservoir (see figure 1). The result of this simple solution is a very high round-trip efficiency of 80 per cent, which compares favourably to other storage technologies.

Pumped storage tends to have high energy-to-power ratios and is well suited to provide long discharge durations at very low energy storage costs. Across different timescales, pumped storage can serve multiple functions (see figure 2). For example, at shorter discharge durations, it is suitable for ancillary services such as frequency balancing and back-up reserve.

With four to eight hours of discharge, it can provide daily shifting for day-night energy arbitrage. For longer durations over 10 hours, it can accommodate multi-day supply profile changes, reduce energy curtailment, replace peak generation capacity and provide transmission benefits.

Figure 2: The plot above visualises (logarithmic scale used) the estimated discharge durations relative to installed capacity and energy storage capacity for some 250 pumped storage stations currently in operation, based on information from IHA’s Pumped Storage Tracking Tool. The vast majority of pumped storage stations have a discharge duration longer than 6 hours, and some are capable of seasonal storage.

The majority of today’s pumped storage stations were built some forty years ago. Yet, they are still providing vital services to our power systems today. With occasional refurbishment, these long-term assets can last for many decades to come.

Despite being a mature technology, the resurgence of interest in pumped storage has brought forth numerous new R&D initiatives. One prominent example is the European Commission’s four-year XFLEX HYDRO project, which aims to develop new technological solutions to enhance hydropower’s flexibility. Latest innovations, such as variable speed turbines and smart digital operating systems, will be tested on a range of pumped storage demonstration sites.

While often thought of as geographically constrained, recent studies have identified vast technical potential for pumped storage development worldwide. Research by the Australian National University highlighted over 600,000 potential sites for low-impact off-river pumped storage development, including locations in California. There is also growing interest in retrofitting pumped storage at disused mines, underground caverns, non-powered dams and reservoir hydropower stations.                              

Seeking a path toward a clean, affordable and secure transition

California is a pioneer in the energy transition. Though many opponents of wind and solar have unfortunately used the blackouts as an example of why their rapid roll-out is a threat to a secure, reliable grid. As noted earlier, the blackouts were not due to too much VRE capacity being on the grid, but a lack of integrated planning to support an evolving electricity mix with sufficient dispatchable generation and storage.

The IEA recently stated that, dispatchable pumped storage, along with conventional hydropower, is the often overlooked workhorse of flexibility. However, its development, like many energy storage technologies, is currently being hampered by the lack of appropriate regulatory frameworks and market signals to reward its contribution to the grid. Outside China, year-on-year installed capacity growth has been anaemic at just 1.5 per cent since 2014 (see figure 3).

Figure 3: Global pumped storage installed capacity by region. Note that 2019 recorded the lowest growth in pumped storage capacity for over a decade, with only 304 MW added. Source: IHA’s database.

Given the technology’s long lead times, investment decisions are needed urgently to ensure that pumped storage, in conjunction with other low-carbon flexibility options, are available to grid operators without needing to rely on carbon-intensive gas-fired generation as a backup. This is especially important as VRE penetration reaches increasingly high levels not yet experienced on a regular basis.

IHA is continuing to work across the hydropower sector and is seeking to learn lessons from other sectors to support the development and deployment of pumped storage. Together with national authorities and multilateral development banks, we are developing a new global initiative to shape and enhance the role of the technology in future power systems.

Further information

Join our Hydropower Pro online community or sign-up to our email newsletter via our website homepage for latest developments.

To learn more about IHA and our work on pumped storage, please visit: www.hydropower.org/pumped-storage

To contact the authors please email nicholas.troja@hydropower.org and samuel.law@hydropower.org

Nick Troja is a Senior Hydropower Sector Analyst. His work focuses on building and sharing knowledge on global hydropower, including identifying trends in project financing, policies and market dynamics.

Before joining IHA, Nick worked for the UK’s steel industry focusing on the EU Emissions Trading System and the impact of other EU level climate change and energy policies on the sector. Prior to this he worked for the UK’s department of energy and climate change, covering a wide range of policy areas and as an adviser to the shadow minister for emissions trading and climate change in Canberra. He holds a bachelor’s degree in international business and master’s degree in public policy.  

Samuel Law is Hydropower Sector Analyst. His work focuses on building and sharing knowledge on sustainable hydropower development, working on topics such as clean energy systems, green financing mechanisms and regional hydropower development.

Samuel holds a master’s degree in environmental technology from Imperial College London and has a technical background in environmental engineering. Prior to joining IHA, he completed an internship with the United Nations in Bangkok. At the UN, he conducted research on Sustainable Development Goals, integrated resource management and collaborative governance, as well as supported project implementation and organised international conferences. He also has experience as a business intelligence analyst in London, where he conducted research on market dynamics and investment trends across industries.

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Australian Renewable Energy Agency

Like the hydroelectric power stations that have powered Tasmania for a century, a new generation of pumped hydro plants will play an important role in Australia’s future energy mix. With the Australian Energy Market Operator forecasting that 15 GW of large-scale storage will be needed by the early 2040s, pumped hydro is expected to operate alongside large-scale batteries and other energy storage technologies. Learn more about pumped hydro here – https://arena.gov.au/blog/how-could-p

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