From the December 01, 2009 issue of Futures Magazine • Subscribe!

Hot markets 2010: Hold on loosely

Ask six different analysts which markets will be hot in 2010, and you are likely to get six different answers. Predictions for an overall economic recovery are murky, and analysts say that any recovery will be slow and steady at best. Fortunately there are some options for traders in what could be a difficult year.

One of the biggest stories at the end of 2009 was weakness in the U.S. dollar and the subsequent all-time highs for gold, both of which are connected to historically low interest rates around the world. Analysts have mixed thoughts about where the dollar and gold are headed
in 2010.

And it is not just gold and currency traders who should take note. It seems that dollar fundamentals need to be addressed before pulling the trigger on any trade. Brian Dolan, chief currency strategist for Forex.com, says the downside for the dollar is limited because the dollar has depreciated to a “politically delicate” level. “The U.S. stimulus package was backloaded and is only going to be hitting a critical mass this quarter and into the first half of 2010. The stimulus efforts in the Eurozone and the UK and China are going to be waning, so between the dollar death march and universal negativity on the dollar, there’s a potential for a stronger than expected rebound in the U.S. dollar,” he says, adding that there’s potential for gold to have a sharp downside correction.

Thomas Hartmann, analyst at Altavest Worldwide Trading, expects gold to remain high and the dollar to stay low in the short term. “The dollar is falling [due to] lack of confidence and until something materially changes — changes in interest rates or changes in fiscal policy — you may not get a change in the direction of the dollar,” he says.

Darin Newsom, senior analyst at Telvent DTN, says it’s difficult to gauge how high gold might go before it breaks. “It depends on the dollar and the dollar may start to build some support. There’s talk that at some point we’ll see interest rates slowly go up, but not until late 2010. If that’s the case, it could keep the dollar flat to slightly supported throughout much of 2010, taking the glitter off of gold,” he says. Newsom adds, however, that the Fed hasn’t shown much support for the greenback.

The Fed following its November meeting reiterated its policy: “The Committee will maintain the target range for the federal funds rate at 0 to 0.25% and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” Analysts have translated that to another six months of the current policy barring something extraordinary.

Carley Garner, trader and analyst at DeCarley Trading, says the dollar index is poised for a breakout in 2010. “There’s a lot of shorts out there that will start looking to take some profits and once that happens we could get a pretty big swing on the upside. The first quarter of next year’s going to be a good time to be long the dollar,” she says.

She adds that if the dollar picks up, it will take a toll on commodities, especially metals. “The metals have a ways to move on the downside. I wouldn’t be shocked to see gold in the first quarter of next year trading back in the $900 area.”

The bigger issue regarding a rebound in the dollar could be the large amount of other investments being financed by carry trades that include a short dollar component. Some traders are already reaping profits from short dollar positions through positive carry and leveraging those positions in other assets. Analyst Nouriel Roubini cautions that could cause huge problems once the dollar recovers.

HOT MARKET PICKS

Analysts’ predictions for the hottest market of 2010 are all over the map. Newsom says that natural gas is poised for a breakout because it’s undervalued in comparison to many other markets. “Natural gas has a real potential for rallying in 2010. It’s been under pressure since 2005 (see “Breaking out”). The fundamentals remain bearish. It’s built a bullish technical signal in its long-term chart; it’s been finding some money coming into it even as other markets struggle,” he says. He says two other undervalued markets are cattle and hogs. “In the case of cattle, you have bullish fundamentals that have been slow to come into play and that could start to bring some support.”

There is legislation in Congress that would support the use of natural gas as a replacement for diesel fuel for over the road trucking. The initiative being pushed by oil trading legend T. Boone Pickens would provide tax credits for the full conversion cost and could, according to Pickens, allow the United States to cut in half the amount of oil imported from OPEC in seven years.

Keith Springer, president of Capital Financial Advisory Services, picks copper as the biggest upward mover of 2010. “Industrial capacity, which is at an all-time low, is going to bounce off so you should see the copper markets get stronger,” he says. Of course, a rebound in copper would be an indicator of a wider recovery as it is an essential commodity for housing and automotive production.

Hartmann picks rice as the breakout market of 2010 due to a potential production shortage this year in terms of yearly usage to demand. Rice production in the Philippines dropped after a tropical storm in 2009, and Hartmann says that the top five rice producers are looking at their stocks dropping by one third. “Rice has the potential to be a barn burner this year with production problems. Coffee [also has] got the potential for a good rally coming into next year.”

Dan Cook, senior analyst at IG Markets, says that on the equities side, single stocks are a better bet rather than overall plays on an index. He expects the huge rally in the equity indexes that began in March 2009 to fizzle out. “Most of [the markets] are due for either a sideways market action or an outright pullback,” he says.

Springer sees a general pick up in commodities. “Any resurgence in the world economy is going to generate demand and consumption. As the world economy resurges, you’ll see a pick up in agricultural commodities [and in] metals.”

Dolan says the safest plays are currencies with the highest yields. “The Australian dollar is the standout, next is the New Zealand dollar, which will continue to benefit from Asian regional growth as well as interest rates. The Australian dollar is looking pretty rich on current levels, but look to buy any corrections on the downside,” he says (see “The price of money” ).

Speaking of interest rates, short-term rates have been frozen near zero for most of the developed world, leading to a drop in volume of fixed income markets, but a return to volatility is expected as central banks around the globe will attempt to rein in some of the capital expended to unfreeze credit markets. Many insiders say it may not be until the second half of 2010, but bond volatility is on the way as fear of deflation gives way to fear of inflation.

As for which markets are headed for a breakdown, Cook says that equities across the board will head lower due to the pullback in quantitative easing. “The Fed’s limiting their credit windows. That’s going to take its toll on the equities markets in the first part of the year. I would look for a pretty sustained pullback.” He expects to see 8,000 on the Dow in 2010 before we see 12,000.

Dolan expects weakness in the yen in 2010, saying it should come under significant pressure because other countries will remove stimulus and gear up for interest rate increases, while Japanese interest rates should remain at 0.1% into 2011.

If we do see economic recovery, Newsom says industrial markets tied to building, like lumber and copper, could benefit. He thinks that soybeans have the largest potential for a sell-off in 2010. Although soybeans rallied and moved into the double-digits in 2009, he says they could grow fundamentally bearish by early 2010. “We’re going to flip the supply-demand situation from bullish in 2009 to bearish worldwide in 2010,” he says.

Garner says if the dollar makes a recovery, it will put pressure on grains in general, with the bulk of the pressure coming in late summer. She expects metals to have a sizable move on the downside in 2010, and expects crude oil to move into the $60 range. Hartmann says if the dollar rises, crude oil could go back down to $50.

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