Market Commentary Week ending April 18, 2008
Interest Rates: June Treasury bonds closed at 116 14/64ths, down 8/64ths after trading as low as 11514 during the session as money moved from the relative safety of Treasuries back to equities on better than expected corporate earnings. The decline this past week can be tied to expectations that the Federal Reserve, in reviewing the corporate and recent economic data may be inclined to not lower rates as was expected. The so called “positive signs of recovery” stated by the Boston Fed’s Rosengren along with the usually “hawkish” Richmond Fed President Jeffrey Lacker stating “personally, I’d be uncomfortable just waiting for economic slack to bring (inflation) down”, led Fed watchers to believe the emphasis may be on inflation instead of the weakening economy. There is no question that the dominant factor in the U.S. economy has to be the continuing layoffs in the financial and manufacturing sectors. That leads us to believe the scenario is in place for a protracted recession and we would continue to favour the long side of Treasuries.
Stock Indices: The Dow Jones Industrials posted a gain Friday of 228.87 points to close at 12,849.36. The S&P 500 gained 24.77 to 1,390.33 and the Nasdaq gained 61.14 points to close at 2,402.97. For the week the Dow gained 4.3%, the S&P 500 also gained 4.3% and the tech heavy Nasdaq gained 4.9%. The positive earnings reports from J.P. Morgan Chase representing the banking sector, Caterpillar Tractor, representing industrial manufacturing, and IBM representing the technology sector set the stage for the rally in equities even though the loss posted by Citigroup was the second straight quarterly loss thanks to the $13.9 billion in credit crisis related write-downs was clearly a negative. The strong dollar on Friday was also a factor in the return to equities from treasuries. We would suggest that the better than expected earnings gains could be attributed to some extent to the burgeoning cost cuts specifically in the labor sector. We would caution against euphoria as the overall picture for equities is, in our opinion, negative and hedging strategies should be implemented immediately. Unpleasant surprises, in our opinion, are in the offing.
Currencies: The June U.S. dollar index managed a rally on Friday gaining 19.5 points to close at 7212. The June Euro consequently lost 82 points to close at 15767, the June Swiss Franc lost 117 points to 9827, and the June Japanese yen lost 129 points to close at 9663. The June British pound gained 22 points to close at 19859. One analyst suggested that the write downs by Citibank might signal an end to the credit crisis is forming and that gave impetus to the shortcovering in dollars. We, unfortunately, do not believe the end of the credit crisis is nearing and that the Federal Reserve will probably cut rates again thinking that lower rates will turn the economy around. I believe that line of thinking to be a fallacy and while rate cuts usually impact the dollar as attraction is diminished, our overall expectation is for continued negative economic data and recession. We once again prefer the long side of the Swiss Franc on any further weakness.
Energies: May crude oil closed at $116.96 per barrel, up $1.83 after trading at a new record of $117 per barrel tied to concern over Nigerian oil supplies. Even with the rally in the dollar which normally would portend a decline in most dollar denominated commodities, the sabotage of a major oil pipeline operated by the Royal Dutch Shell Co superseded the dollar/crude price relationship. We continue to feel at some point in the future, based on a weakening global economy, that crude prices will recede to the more palatable $60 level. For the time being “dipping ones toe in the put area” would be all we could recommend. Otherwise stay out.
Copper: May copper closed at $3.8880 per pound, down 2.4c on the strong dollar and continued economic concerns. Supplies are adequate and we feel will increase tied to slowing demand from the industrialized countries. However, any disruption of supplies based on either improved supply/demand figures or tied to geopolitical events could impact prices one way or another. One concern is that the decline in the U.S. economy could impact a major goods supplier, China, may reduce demand for copper from that Country. Reports that Union workers at one of Peru’s metallurgical plant and facilities were returning to work after their strike was declared illegal also figured in the weakness in copper. We continue to feel copper prices will decline to below $3.00 per pound but as in our crude oil expectations, timing is the determining factor.
Precious Metals: June gold sold off sharply on Friday losing $27.70 per ounce to close at $915.20 after trading as low as $907.30. The rally in the dollar and better than expected earnings from a cross section of the economy prompted the shift from precious metals and treasuries back to equities. May silver lost 48.5c per ounce to close at $17.82 while the white metals fared better with July platinum gaining $9.80 to close at $2,071.30 and June palladium gaining $12.20 to close at $473.40 per ounce. We once against suggest that our readers “toss” the gold charts and concentrate on the dollar and U.S. interest rates to try to determine the next move in gold.
Grains and Oilseeds: July corn closed at $6.13 per bushel, down 4c on speculator selling and a technically overbought condition. New fundamentals are need to determine future price direction. We would avoid corn from here. July wheat closed at $8.85 per bushel, down 43c tied to an increase in supplies and a lack of any bullish news. We would avoid wheat. July soybeans closed at $13.77 per bushel, up 10.4c on short covering after early selling tied to uncertainties on acreage. Short covering emerged after the early selling and beans rallied. We continue to favour the long side of soybeans.
Coffee, Sugar and Cocoa: May coffee closed at $1.3525 per pound, down 4.4c tied to the strong dollar on Friday with May/July rollovers in front of notices on Monday. Expectations that the worst of the credit crisis in the U.S. was over prompted the strength in the dollar and heavy long liquidation in coffee. We prefer the sidelines for now. July cocoa closed at $2.665 per tonne, down $76 after early strength during the week and managed a weekly gain of $105 per tonne. The strength in the dollar prompted the selling on Friday, but if the dollar weakens again on Monday, we could see a return to bullish sentiment for cocoa. Cocoa is trading within its technical range and until we see a breakout either way, we would avoid new positions. May sugar closed at 12.45c per pound, down 12 points with July losing one point to close at 13.29c per pound. The strength in the dollar blamed for the selling in the nearby. We have been avoiding sugar for some time and continue to feel various stimuli relating to interest rates, the dollar, and the ethanol speculation will move prices unpredictably. Stay out.
Cotton: May cotton closed at 70.88c per pound, down 87 points with the more active July contract losing 68 points to close at 74.60c. July cotton lost 309 points for the week and without fresh fundamentals we see no reason to get involved. Stay out.
John L. Caiazzo
Website: www.acuvest.com
E-mail: futures@acuvest.com
Information provided is from sources deemed to be 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 in investments and opinions are his own and not of the Futures Commission Merchant he introduces his clients to.
