The expectation that the Fed may finally decide to pause in its rate increase program lent support to copper prices last week.
The markets continue to watch the events unfurling in the Middle East as well as look forward to the Federal Reserve meeting this week. All eyes are on the Fed and the indicators it uses to watch for signs of whether or not further tightening is necessary to stave off inflation.
Copper
September copper closed at $3.6325, up 14.30¢ per pound after trading as high as $3.6850 during the session. The expectation that the Fed may finally decide to pause in its rate increase program lent support to copper prices. This is an opportunity to buy additional puts because the possibility of a pause would be directly linked to a declining U.S. economy. The demand for copper with the decline in housing and auto sales could be sharply diminished and impact prices. The workers at the Escondida copper mine are continuing with threats of a strike, and that could impact copper production. Once again the decline in the U.S. demand for copper could easily offset the shortfall in production. Stay short.
Interest rates
September bonds closed at 109-08, up 18 points with the September 10-year gaining 12 points to 106-17.5. We continue to feel further tightening by the Fed could easily tip the scales and put the U.S. economy into recession. Stay long the bonds but don’t add to positions until after the Fed meeting early in the week.
Stock indexes
The Dow Jones industrials closed at 11,240.35, down 2.24 points but managed to eek out a weekly gain of 0.18%. The S&P 500 closed at 1,279.36, down 0.91for the day with a weekly gain of 0.07%. The Nasdaq lost 7.29 points for the day to close at 2,085.05 and lost 0.43% for the week. We continue to watch for action by the Fed or the indicators they watch to try to predict what they may do. Unfortunately, no one knows what goes on at those meetings so caution should be applied to any action. We cannot stress enough the need for strategic hedging of equity positions.
Currencies
The September U.S. Dollar Index closed at 8438, down 42 points against the 68 point gain in the Euro to 12914. The dollar weakness is attributable to the expected “pause” in the Feds rate increase program.
Energies
September crude oil closed at $74.76 per barrel, down 70¢ after the storm threatening the Gulf of Mexico’s oil production was reduced to a depression and allayed fears of another “”Katrina.” September Natural gas lost 4.6¢ to close at $7.245 per mBtu. We favor the sidelines but continue to expect crude oil prices to eventually return to the $40 to $50 level. Unfortunately, we may see higher prices first due to the hostilities in the Middle East and the potential for Iran, a major producer, to join in the fight against Israel.
Precious metals
December gold closed at $656 per ounce, down $1 even though the usual relationship between gold and the U.S. currency in which it is denominated is an opposing one. The old adage, “dollar down, gold up; dollar up, gold down” has been set aside in recent weeks. We continue to feel the use of gold has been overplayed by the “gold bugs” and is merely for use in jewelry, not for the anxious times we now find ourselves in. Stay out. September silver closed at $12.4850 per ounce, up 39.5¢ on Friday but we would expect profit taking early in the week and would avoid it. October platinum gained $9.50 per ounce to $1,256, tied to the weakness in the dollar and September palladium gained $2.85 per ounce to close at $327.50. We simply do not like the complex at this time. The use of platinum is primarily used in the catalytic converters in automobiles and with the auto industry “decimated,” demand is declining. Palladium is also used as a catalyst and because it has similar characteristics to platinum, we favor palladium in the group.
Grains and oilseeds
September corn closed unchanged at $2.45 per bushel with December gaining 1/4¢ to $2.62-1/4. Weather remains the main feature with relatively little attention being paid to the ethanol application. Stay out for now. September wheat closed at $3.96 per bushel, up 3/4¢ with December gaining 2-3/4¢ to close at $417-1/4¢. The reduction in the spring wheat crop caused by drought prompted the buying in the forwards. We like wheat but would wait for pullbacks. Weather problems could easily reduce crop estimates and invite short covering and new fund buying. November soybeans closed at $5.97 per bushel, up 1-1/2¢ in expectation of further hot weather in the growing areas. The hot weather could impact pod development in the soybean growing areas of the central United States and brought in short covering and new buying. Stay long the beans.
Coffee, cocoa and sugar
September coffee closed at $1.0545 per pound, down 40 points with December losing 1/2¢ to $1.0945. A fund was a buyer early in the session but speculators and locals sold into it and pushed prices lower. We are back in the bull camp in coffee but look for two sided action with roaster buying against origin selling. This market is not for the “weak of heart” or “equity.” Stay out for now. September cocoa closed at $1,504 per tonne, down $19 in a wide range on Friday and remains on our “not to do” list. The weak dollar should have helped prices but didn’t. Stay out. October sugar closed at 14.41¢ per pound, up 13 points with the March contract closing at 14.93¢, up 14 points. Technicians were responsible for the trading during the session with speculators buying against trade and producer selling. Stay out of this “tug of war.”
Cotton
December cotton closed at 56.28¢ per pound, down 87 points after trading in a range between 55.75¢ and 57.15¢. Locals who had bought early were caught when spec selling entered the market and drove prices down. A lack of fresh fundamentals allowed for the two-way action. Stay out for now, but I like cotton on a decline to the 50¢ to 51¢ level basis the December.
