June 27, 2006 – The market action in a number of the commodities and indexes we follow has turned would-be day traders into long-term investors.
We expect this week’s action will be dominated by the Federal Reserve and the anticipation of what they will do; an increase is a foregone conclusion. The question is whether it will be 25-basis points or 50-bps. Either is financial suicide for the U.S. economy.
Interest ratesSeptember U.S. treasury bonds closed at 10522, down 9/32 in what seems to me to be a never-ending downward spiral in prices (see chart). Longs sold out in front of the weekend and prices declined giving a defacto boost to the long rate. We continue to feel that the expected decline in the U.S. economy will start to materialize in short order. The potential rate increase, without examining the full impact of the last few increases on the economy, is negligent on the part of the Fed in my opinion. Stay with the bond calls for now.
Stock IndexesThe Dow Jones industrials closed at 10,989.09, down 30.02 points as traders await the Federal Reserve’s Open Market Committee meeting on the June 28. The expectation is for at least a 25-bp point increase, but some Fed watchers think they might go as high as 50-bps. My feeling is the Fed must have an idea, based on the decimated U.S. auto industry and slackening demand for new homes, that another increase would be severely detrimental and could lead to recession, because the prior increases are only now being felt. The S&P 500 closed at 1,244.50, down 1.10 while the tech-heavy Nasdaq closed 1.52 lower at 2,121.47. For the week the Dow lost 0.23%, the S&P 500 0.56% and the Nasdaq 0.40%. Once again, implement those hedging strategies before it’s too late.
CurrenciesThe September U.S. dollar index closed at 8645, up 44 points against the euro’s loss of 67 points to 12591 and the Swiss Francs loss of 34 points to 8088. The perception of a higher U.S. rate prompted dollar short covering and new buying. It is a mistake and would nibble at long positions in the Swiss Franc either futures or call options.
EnergiesCrude oil continues on both sides of $70 per barrel and we cannot begin to gauge the severity of the impact on world economies. My thought is that the current price is an invitation to find alternate sources of energy. I hope one day, given the advances in alternative energies, that OPEC can buy water from us. Of course, that is only a dream right now.
CopperSeptember copper closed at $3.1510 per pound, up 10.25¢ after sideways early action in the pit. The dollar, which usually dictates the direction of dollar denominated commodities, did not have any effect on copper late in the session. Shorts covered in front of the weekend; traders are concerned about this week's Fed meeting and what rate changes can do to both the dollar price of copper and the demand from the major users such as the auto and housing industries. Of course far East demand remains an unknown factor. We expect prices to decline sharply and would hold put positions. Precious metalsAugust gold closed at $588 per ounce, up $2.60, while July silver closed 7.5¢ higher at $10.285. Dollar strength prompted a weaker market early in the session with August gold trading as low as $574.50 and July silver to $9.96 per ounce. Buying developed by technicals on an oversold basis and on shortcovering in front of the weekend. July platinum closed at $1,166.90 per ounce, down $9.20 while the October contract lost $9.70 per ounce to $1,179.40. September palladium closed at $309.80, down $4.10. We would avoid the group altogether. Grains and oilseedsJuly corn closed at $2.28 ¼ per bushel, down 2 1/4¢ with December losing 1 ¾¢ to $2.55 ¼. Speculator selling and commission-house sell stops pushed prices to new lows near the close. We would stand aside for now awaiting fresh fundamentals. September wheat closed at $3.81 ½, down ¾¢ per bushel as traders evened up in front of the weekend. Funds were net sellers. Stand aside for now. Export demand is a factor and could prompt a change in opinion. July soybeans closed at $5.80 ½ per bushel, down 2 ½¢ with new crop November losing 2 ¼¢ to $6.06 ½. Bearish new term crop conditions and technical pressure prompted the long liquidation in front of the weekend. We would use any weakness of 10¢ to 20¢ to buy futures or calls on the November contract.
Coffee, cocoa and sugarJuly coffee closed at 95.30¢ per pound, down 40 points with September losing 50 points to close at 96.60¢. Local and fund sales against industry buying the main feature in the session. We would once again stand aside. September cocoa closed at $1,543 per ton, up $8 and remains in a trading range. We would look to buy the September contract around $1,525 with stops under $1,490. Otherwise stay out. Friday’s trading against the stronger dollar was only moderately impressive to this writer. July sugar closed at 15.45¢ per pound, down 30 points with October losing 28 pints to 15.93¢. Specs sold the spot against next week’s expiration and some rollovers noted during the session. Sell stops were triggered in the forwards as well, and we like the sidelines for now. CottonJuly cotton closed at 46.12¢ per pound down the 300 point limit and broke supports. December lost 1.4¢ per pound to 53.58¢ after trading as high as 55.24¢. We could see carryover long liquidation on Monday so we would opt to stand aside. Some traders called the selling a panic selloff and ran into heavy commission house sell stops.
John L. Caiazzo(951) 693-9600 (951) 693-3170 faxfutures@acuvest.comwww.acuvest.com
Information provided is from sources deemed reliable but not guaranteed. Futures and Options trading involve a high degree of risk and may not be suitable for everyone. John Caiazzo is a registered commodities broker with over 40 years experience. These opinions are his own and not those of the futures commission merchants to whom he introduces his clients.
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