Market Commentary Week ending May 1 2009
Overview: The so-called Swine flu, misnamed since the current flu is transmitted human to human and possibly human to swine not the other way around, has dominated the news as reminders of past epidemics were re-hatched. The current flu is serious enough to consider it an epidemic with the global death toll escalating. Hopefully the medical community can fine a cure before it becomes a pandemic. The results of the so called “bank stress test” should be released on Tuesday to the banks and publicly on Thursday. Our comments therefore are conservative considering the potential ramifications of the report.
Interest Rates: June Treasury bonds closed at 122-05, down 13 points as data reported on Friday indicated the potential for an economic turnaround or at least a slowing of the economic decline. U.S. Manufacturing contracted at a slower pace in April thanks to improving order activity and production along with improved inventory numbers. The Institute for Supply Management report on Friday prompted the selling in Treasuries as money once again moved from the relative safe haven of Treasuries to the equity markets. The ISM’s manufacturing index was 40.1 in April against 36.3 for March. Any reading under 50, however, continues to show activity contracting. Another factor was the Commerce Department report that orders for manufactured goods decreased 0.9% after the downwardly revised 0.7% rise in February after the original increase of 1.8% rise. That kept Treasuries from declining further. The one key factor considered most important was consumer confidence which according to the Reuters/University of Michigan data showed a reading of 65.1, against 61.9 in the early survey and against 57.3 for March. The figure shows consumers are confident and translates to their willingness to purchase products. We prefer the sidelines in treasuries.
Stock Indices: The perception that the recession is over prompted continued gains in equities with the Dow closing at 8,212.41 on Friday, up 44.29 points with a weekly gain of 1.7%. The S&P 500 closed at 877.52, up 4.71 points for a weekly gain of 1.3%. The Nasdaq closed at 1,719.20, up 1.9 points and posted a weekly gain of 1.5%. U.S. auto sales fell 34.4% in April which was close to the lowest levels in almost 30 years and Chrysler was forced to seek bankruptcy protection. With the housing and auto industries continuing under pressure, all the rhetoric emanating from Washington will not have a marked effect on the economy and after the recent “honeymoon” with equities subsides, we continue to look for a severe sell off. Implement hedging strategies.
Currencies: The June U.S. dollar index closed at 8470.5, down 7 points against gains in the June Euro of 4 points to 1.3265, the June Swissie, 32 points to 8815, the June British pound 102 points to 1.4922, and the June Canadian dollar 67 points to 8451. The June Japanese yen closed at 10069, down 68 points. Traders tied the recent dollar strength to the perception that the U.S. economy has bottomed, an assumption we disagree with and Friday selling of dollars was a correction and profit taking. We look for continued sideways action in currencies and favour the long side of the Swiss Franc on any setbacks.
Energies: June crude oil closed at $52.61 per barrel, up $1.49 on prospects of an economic turnaround in the U.S. While we feel the U.S. economy has not bottomed, we still look for crude oil to eventually move to the $60 per barrel level on potential production cutbacks from producing countries and OPEC, but for the time being, we like the sidelines.
Copper: July copper closed at $2.1010, per pound, up 5.35¢ on the perception that the U.S. economy has bottomed and that with the “help” from the U.S. administration, car companies will survive. The drawdown of stocks at the LME of 7,075 metric tons Friday to 398,700 was also a factor in the short covering. The Thursday Comex inventory data showed inventory steady at 48,055 tons. Hold put positions but as advised last week, do not add.
Precious Metals: June gold closed at $888.20 per ounce on Friday, down $3.00 as perception abounds that the U.S. economy has turned the corner. As the consumer of the world, the way the U.S. goes, so go its global trading partners. The U.S. recession spread worldwide, and any turnaround is expected to also affect the turnaround of global economies. We, of course, disagree that the U.S. economy has bottomed and consequently gold prices will continue to gyrate and in wide price swings. July silver closed at $12.50 per ounce, up 17.5¢ on short covering after overreacting to the gold decline. Silver has industrial applications and finds support from end users. July platinum closed at $1,096.40, down $10.20 per ounce while June palladium lost $4.30 per ounce to close at $213.90. We prefer the sidelines in metals for all but well capitalized trading accounts.
Grains and Oilseeds: July corn closed at $4.13 ¾ per bushel, up 10 ¼ on planting concerns and in conjunction with the buying in the soybean and wheat pits. We prefer the sidelines but expect further short covering early in the week. July wheat closed at $5.70 per bushel, up 33.5¢ and close to a four week high. Short covering and technicals the main feature and in conjunction with the buying in Soybeans. We prefer the soybeans as indicated last week. July soybeans closed at $10.91 per bushel, up 36¢ on technicals and short covering which ran right through overhead buy stops. Reduced estimates for Argentina’s soybean crop prompted buying. As I mentioned last week, we like soybeans due to tight old crop supplies and concerns over the Argentina estimates. Weather also remains a factor. Add to longs on any setback and bring up those trailing stops.
Coffee, Cocoa and Sugar: July coffee closed at $1.204 per pound, up 4.5¢ on fund buying and technicals. Gains in other commodities such as the grains, crude oil and others prompted the buying as well as Brazil’s increase of the minimum Arabica coffee price. We could see further buying and would add to the long positions suggested last week. Fundamentals remain bullish but as stated earlier, use stops. July cocoa closed at $2,324 per tonne, down $51 in its weakest showing since early March. Favourable weather conditions at Ivory Coast and upcoming harvesting should also add selling pressure to cocoa. Stay out for now. July sugar closed at 15.05c per pound, up 69 points tied to strong crude oil, the weak dollar on Friday, and buying in other agricultural pits. We prefer the sidelines but expect carryover buying now that sugar has breached overhead support at 15c.
Cotton: July cotton closed at 57.20¢ per pound, up 2.85 tied to strength in the other agricultural commodities. A lack of selling in view of the bullish export demand early in the week prompted much of the early buying by funds which ran into over head buy stops. We would now get back on the long side after last week’s indication of a respite. Use stops.
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.
