The euphoria attached to the recent slide in energy prices may be short lived. Market watchers are sceptical about the lower prices attached to the growing surpluses in energy products, the recent hurricane that missed the Gulf of Mexico and the relative stability in the Middle East. The U.S. Federal Reserve will likely not raise interest rates its next meeting, and possibly lower rates thereafter into early 2007, but I for one do not believe that happy days are here again.
The U.S. economy is in fact slowing down as evidenced by the nominal increase in the CPI and the week jobs numbers. The U.S. auto industry and the housing industry have lost too many consumers for the economy to maintain upward momentum. The related industries also could be planning enormous layoffs in the near future.
Each layoff reduces consumer spending far more than is reported in the weekly 300,000 first-time unemployed. Most of those unemployed have “consuming families” and during times of hardship, spending is curtailed across the board in the U.S. and internationally. The only bright light is the potential for reducing the trade deficit, since the consumers I mention are the biggest reason for it. While my comments may be sound gloom and doom, pay attention to economic and corporate news and protect yourself against unpleasant surprises.
Interest ratesDecember Treasury bonds closed at 11015, down 2/32nds after an influx of data including the University of Michigan consumer expectation for inflation being the lowest since March. The August consumer price index was nominally higher and prompted early buying. Later in the session, the market met resistance and sold off in front of the weekend. We continue to favor the long side of treasuries since our belief remains unchanged that the U.S. economy is in the doldrums and the Fed simply cannot risk “plunging” it into recession even as we suspect we are already seeing signs of that. Stay long the bonds.
Stock indexesThe Dow Jones Industrials closed at 11,560.77, up 33.38 points with the S&P gaining 3.59 points to 1,319.87 and the Nasdaq picking up 6.86 points to close at 2,235.59. The expectation that the weak inflation data could lead to an unchanged Fed funds rate, and possibly prompt a rate cut in the near future, prompted heavy short covering and new buying. However, the honeymoon will soon end in divorce; start implementing strategic hedging strategies.
CurrenciesThe December U.S. index closed at 8566, up 35 points against the euro loss of 64 points to 12725 and the Swiss franc loss of 25 points to 8033. The Japanese yen basis the December contract closed at 8606, down 9 ticks. Traders evened up in front of the G7 meeting over the weekend. Weak U.S. economic data would prove negative for the dollar since it projects lower interest rates. However, should any of the G7 participants lower their rate, it would be a de facto increase for the U.S. rate and would add further support to the U.S. dollar. We would buy Swiss francs on any pullback.
EnergiesOctober Crude oil closed at $63.33 per barrel, up 11¢ while October heating oil lost 87 points to $1.7023 per gallon and October unleaded gas gained 2.28¢ to $1.5750 per gallon. The recent selling pressure on crude oil was due to expectations that supplies are more than adequate in front of winter in the heavy use areas. We would avoid positions in energy products while we still expect “eventual” pricing for crude to
CopperDecember copper closed at $3.3115 per pound, down 6.3¢ to their lowest level in a month. The general selling in commodities against the U.S. dollar strength and the weakness in energy products prompted selling, but then ran into heavy sell stops, which pushed prices sharply lower. We expect a weakening international economy, predicated on a weakened U.S. economy, will reduce the demand for copper. We would add to put positions. The United States is the consumer to the world; and manufacturing countries, especially in the Far East, rely on us. Any change in consumer spending habits tied to U.S. unemployment numbers could have the effect of reducing the trade deficit and causing international recession. Stay with the puts.
Precious metalsDecember gold closed at $583, down $3 on Friday with December silver losing 7.5¢ per ounce to $10.875. October platinum sold off sharply closing at $1,163.70, down $15.80 while December palladium lost $12.40 per ounce to close at $314.80. The gain in the U.S. dollar was also a factor, but it would appear that longs just decided enough was enough after the sharp declines in precious metals. U.S. television continues to portray gold as a necessity for investor positions. I maintain that gold is good for one thing and one thing only: jewellery. Stay out.
Grains and oilseedsDecember corn closed at $2.41 ¾ per bushel, up 4 ½¢ on short covering and in line with the strength in the soybean pit. We prefer the sidelines. December wheat gained 2¢ per bushel to close at $3.92 ½ mostly tied to technicals after recent price declines. Prices are at strong support levels and even though fundamentals have not changed, hopes for increased demand and technicals prompted short covering and new fund buying. We prefer the sidelines here as well. November soybeans closed at $5.49 ¾ per bushel, up 4 ½¢ with December meal gaining $2.80 to $162.60 per ton but December beanoil lost 20 points to close at 25.06¢ per pound. As is usually the case, demand for one product usually prompts over supply in the other. We prefer the long side of beans and would now add to long positions after recent losses.
Coffee, cocoa and sugarDecember coffee closed at $1.0210 per pound on fund selling right from the opening bell. Large spec buying failed to halt the slide in coffee and we remain defensive. Brazilian-coffee export data showed an increase from August during the early weeks of September, and specs sold out positions that were put on after recent supportive buying by funds. Trading was light on Friday as traders were concerned over the outcome of the proposed purchase of the New York Board of Trade by Intercontinental Exchange. Stay out unless fundamentals change. December cocoa closed at $1,473 per tonne, down $15 and remains on our “no interest” list. October sugar closed at 12.44¢ per pound, up 28 points with March gaining 23 points to 13.28¢. Technically, we bounced off a support level and we could see further buying by specs but without fund participation, I do not expect prices to carry much further. Stay out for now but be prepared to jump in on the long side should funds start nibbling.
CottonDecember cotton closed at 53.13¢ per pound, up 49 points. This market could go either way and we would prefer to hold off any buying pending a price break to the 50-51¢ level. Otherwise stay out for now and look for more interesting markets like interest rate futures.
John L. Caiazzo
futures@acuvest.com
(951) 693-9600 phone
(951) 693-3170 faxwww.acuvest.com
Information provided is from sources deemed reliable but is 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 more than 40-years experience in investments. His opinions are his own and not of the Futures Commission Merchant to whom he introduces clients.
