The negative U.S. economic data keeps pouring in. The Reuters/University of Michigan consumer sentiment index fell to 66 in July, in line with economist’s forecasts, down from 70.8 in June. The first time in five months that the confidence index fell. Also reported by the U.S. Census Bureau Friday was the over 18.7 million empty homes during the second quarter of 2009. The recession is being called the worst in over 50 years. Home prices also dropped by an average 33% since 2006 according to the S&P/Case-Shiller index. The unemployment rate in June was the highest in nearly 26 years. The total of U.S. banks to be closed rose to 64 for the year tied to the credit crunch. More banks are on the watch list and I expect to hear of further bank closings. The FDIC will no doubt prove to be over-extended and that means the Federal Government will have to once again pump money into the financial system. With all the negative news, it is amazing to me that the equity markets, in expectation of a recovery toward the end of 2009, continues to strengthen. I see a black home under global equity markets and the earnings reports we see that are “painting a rosy picture”, are no doubt the result of labor cuts and not the product sales so desperately needed to get people back to work. Now for some individual comments.
Interest Rates: September Treasury bonds closed at 11603, up 15 points in a sideways market with much of the action tied to the equity market concerns. We continue to view treasuries as a trading affair within the recent price range. Since I do not see any signs of inflation, I would look for bonds to rally on any further bad economic or corporate earnings data.
Stock Indices: The Dow Jones Industrials closed at 9093.24, up 23.95 and for the week gained 3.99%. The S&P 500 closed at 979.26, up 2.97, and 4.1% for the week. The tech heavy Nasdaq lost 7.64 points to close at 1965.96, but managed a gain for the week of 4.2%. Stock prices gained on better than expected earnings reports which when analyzed are mostly tied to cuts in labor costs and other cost cutting measures rather than increases in sales. We continue to view the equity markets as overbought and the “black hole” under the markets is getting deeper in our opinion. Implement hedging strategies.
Currencies: The September U.S. dollar index closed at 7894.5, down 2.5 points aainst gains in the September Euro of 12 points to 14216, the September Swiss franc 18 points to 9353, the September Japanese yen 47 points to 10562, and the September Canadian dollar 14 points to 9229. The September British pound lost 88 points to close at 16430. The German business sentiment index for to its highest level since October. The Euro zone services and manufacturing sectors declined less sharply than expected in July. We continue to favor the long side of Swiss Francs.
Energies: September crude oil closed at $68.05 per barrel, up 89c on expectations of a global economic recovery, an “observation” we do not subscribe to. The U.S. is the heaviest user of crude oil and the prospect of an economic recovery on the basis of U.S. corporate reports prompted short covering in crude, heating oil, gasoline and natural gas. We would not be so enthusiastic but after recent declines, a correction was to be expected. We see further pressure on crude as the reality of the continued economic slump in the U.S. weighs on prices. Stay out for now.
Copper: September copper closed at $2.5220 per pound, down 20 points after touching a nine month high during the session. Copper prices rally with the equity markets as both are subject to changes in economic data. Inventories at the LME rose by 2,225 metric tonnes on Friday to 273,950. The Comex reported a decline of 591 short tons to 56,971 while the weekly data from the Shanghai Futures Exchanges showed a decline in inventories of 3,935 metric tons to 49,348. Demand from Asia continues to be an important factor in copper markets. We once again suggest holding put positions and letting them expire if they are in nearby months but would not add to positions as we mentioned in prior commentaries.
Precious Metals: August gold closed at $953.10 per ounce, down $1.70 with September silver gaining 10.5c to close at $13.875 per ounce. October platinum closed at $1191.40 per ounce up $3.40 while September palladium gained $1.25 to close at $261.45. The weakness in the U.S. dollar accounted for the action on Friday and thoughts of inflation tied to the expectation of a global economic recovery is helping precious metals maintain their price levels. We do not see any recovery in the near term so we expect prices for precious metals to decline on any stabilization of the U.S. dollar.
Grains and Oilseeds: September corn closed at $3.16 ¼ per bushel, down 10 3.4c after Thursdays rally failed to carry to Fridays session. Thursdays action was tied to concerns over U.S. planted acreage and traders covered short positions. With no follow through prices declined on Friday. We prefer the sidelines. September wheat closed at $5.16 ¼ per bushel, down 15 1/2c and lost 25 1/2c for the week. Fundamentals remain weak on failure to follow through on the heavy shortcovering and new buying of Thursday prompted long liquidation coming into the weekend. With global supplies considered ample, we see no reason to buy wheat but would not be short “anything that grows”. November soybeans closed at $9.15 per bushel, down 17c mostly on a correction after Thursdays price gains. Weak cash soybean basis levels and bearish Corn Belt weather prompted long liquidation. We prefer the sidelines for now until new fundamentals emerge.
Coffee, Cocoa and Sugar: September coffee closed at $1.2395 per pound, down 60 points with no real change in fundamentals with the exception of some light selling by origins. With wet weather expected over the weekend in Brazil, prices were able to hold but weather could be a determining factor if any damage in linked to the quality of the crop. We could see further selling on good harvest reports. September cocoa closed at $2,907 per tonne, up $24 after opening lower on light volume. Traders attempted to run the overhead resistance at around $2,930 as volume increased. The choppy two sided action however, keeps us on the sidelines. If cocoa, basis the September contract breaks through and closes above $3,000 per tonne, we could see an interesting upside move to the $3,100-3,200 level. If it fails we will once again witness the indecisive characteristics of this market. Reports that rains in the Ivory Coast are causing black pod disease on some farms, could prompt shortcovering and run through the resistance as I described. This market is for well capitalized professional traders due to the wide price swings making stop protection ineffective. October sugar closed at 18.43c per pound, up 17 points on speculator buying tied to concern over Indian supply deficits and bullish chart configurations. We could see further gains to the 20-23c level but as in cocoa, trading should be limited to professional traders able to move quickly on any change in sentiment or fundamentals.
Cotton: December cotton closed at 59.61c per pound, down 2.11c on weakening fundamentals. Stay out
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.