The story this week was the U.S. Federal Reserve statement indicating a change of attitude toward the “assumption” of a strong economic recovery. The less than enthusiastic Fed statement led investors to believe that the U.S. economy could possibly slip into a “double dip” recession. Attention also returned to the Eurozone specifically Spain, Italy and Greece as indications that the debt crisis is far from over. Global markets reacted to the weak response to an Italian debt auction and gave rise to speculation that certain of the Eurozone countries remain in crisis tied to their debt and the ability to resolve issues such as labor unrest tied to austerity programs. We suggest a “hands on” approach to any trading this coming week. Technicals suggest wide price swings. Now for some actual information….
Interest Rates: September treasury bonds closed at 13200, up another 25 points on disappointing reports from Washington. The Commerce Department reported U.S. retail sales rose only 0.4% in July and was less than expected. The Consumer price index was up 0.1% and excluding food and energy, up 0.3% in July and was in line with expectations. June business inventories up 0.3% and the University of Michigan/Reuters index of consumer confidence rose to 69.6 in early August from 67.8 in July exceeding expectations. Fannie Mae and Freddie Mac back over half of all U.S. mortgages but are considered effectively insolvent and are of major concern to investors and analysts. Treasuries provide a safe haven when economic validity is in question and this past week evidenced that concern. The U.S. administrations current level of spending should warrant additional treasury sales and further exacerbate the budget deficit. We would buy puts on treasuries at current levels and on any further rallies since we view the markets as overdone.
Stock Indices: The Dow Jones industrials added to Thursdays triple digit losses with a 16.80 point loss to close on “Friday the 13th” at 10,303.15. The Dow lost 3.3% for the week. The S&P 500 closed at 1079.25, down 4.36 and lost 3.8% for the week. The Nasdaq closed at 2173.48, down 16.79 on Friday and for the week posted a loss of 5% for the week. The reality of a slowing “economic recovery” if you can call it that prompted the long liquidation of securities. The fact remains that the U.S. economy is fragile and the Fed Chairmans “statement” on Thursday lent credence to my negative assessment of the economy and validates my admonition of “getting ones investment house in order” and “implementing hedging strategies”.
Currencies: The September U.S. dollar index gained 27.1 points on Friday closing at 8303.8 against losses in the major currencies. The Euro lost 70 points closing at 127.52, the Swiss Franc 22 points to 9494, the Japanese yen 46 points to 116.00 and the Australian dollar 7 points to 8901. Gains were posted in the September British pound of 25 points to 155.89 and the Canadian dollar 19 points to 9590. U.S. retail sales data and concern over the weak Italian debt auction and Spain and Greece ongoing problems created the flight to dollars this week. We continue to suggest avoiding positions in currencies but would hold previously recommended long positions in the Swiss franc.
Energies: September crude oil closed at $75.39, down another 35c and entering our previously suggested price range of $70-75 per barrel. U.S. economic data prompted concern that energy demand tied to growth could dissipate. September natural gas closed at $4.33 per mbtu, up 3c while Gasoline closed at $1.9396, down 1.52c per gallon. We prefer the sidelines.
Copper: September copper closed at $3.2520 per pound, down 3.2c on the negatively construed U.S. economic data. Inventories at the LME fell by 525 metric tonnes on Friday to 408,550. Comex inventory data released Thursday showed a decline of 378 short tons to 97,619. The gain, however, at the Shanghai Futures Exchange of 7,502 metric tonnes to 113,870 showed reduced demand from the Far east and prompted the long liquidation on Friday. We continue to maintain a bearish stance toward copper since, in our view, the so called economic recovery is a “myth”. Hold put positions..
Precious Metals: December gold closed at $1,216.60 per ounce, down 10c tied to the U.S. economic data which alleviated concern of “inflation” for the time being after recent price gains. Gold is a “safe haven” in times of global tension, currency concerns, and inflationary fears. We prefer the sidelines but are an agent for gold purchases for those investors who would prefer gold to “paper” investments. The link is on our website. December silver closed at $18.165 per ounce, up 4.4c and as we suggested recently, purchases can be effected at our below $17. October platinum closed at $1,526.20, down $5.40 with September palladium gaining $6.20 to close at $477.25. Other than the purchase recommendation for silver we could now consider re-establishing the long palladium, short platinum spreads that proved so profitable for our readers that followed our recommendation.
Grains and Oilseeds: September corn closed at $4.11 ¾, up 5 1/2c with December also gaining 5 1/2c to close at $4.27 per bushel. Speculative funds were buyers of approximately 10,000 contracts. Reduced production estimates for alternative feed stock prompted the buying in corn. Concern that the reduced available wheat due to the serious problems in Russia could make corn more appealing and prompt additional buying. We like corn from here on that basis and could see prices move towards $4.75 to $5.00 per bushel. September wheat closed at $7.02 ½ per bushel, down 10 1/2c and lost 23 ¼ cents for the week after its meteorical rally in recent weeks. The USDA slashed the outlook for global wheat production tied to the devastating drought in Russia. This market is too volatile for small speculators and as such we would avoid any recommendation for wheat. November soybeans closed at $10.44 per bushel, up 15.4c on increased U.S. exports and global demand. The USDA revised export projections provided strong support for soybeans. Demand from China another major factor in the continued rally in soybeans and as we have been bullish for soybeans for some time, we favor addition to long positions and raising the trailing sell stops.
Coffee, Cocoa and Sugar: September coffee closed at $1.7550 per pound, down 5 points in choppy trading after Thursday’s rally. Lack of selling by origins factor but frost concerns overdone. We prefer the sidelines. September cocoa closed at $2,854 per tonne, down $22 on favorable weather reported from the Ivory coast, a major grower. We prefer the sidelines here as well. October sugar closed at 19.42c per pound, up 45 points and approaching our term objective of 20c. The devastation in Pakistan affected their sugar cane crop and produced ideas of short supplies going forward. We could see additional buying but only with stops.
Cotton: December cotton closed at 84.18c per pound, up 63 points and the highest price since late 2008. The USDA cutting world stocks and increased U.S. exports prompted the buying as well as Pakistans cotton crop being washed away by floods. We like cotton but only on setbacks and with stop protection.
John L. Caiazzo
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 to which he introduces his clients.