“Now is the winter of our discontent.” A turn of this phrase coined by William Shakespeare feels applicable to today: “Now is the summer of our discontent.” The global economic climate is not consistent with rhetoric expounding a recovery, when in fact the evidence points to, in our opinion, a continued recession as opposed to a “double dip” recession. The employment situation is worsening, and the level of loan defaults and home foreclosures is continuing at a record pace. We will attempt to discern fact from fiction and offer our readers suggestions as to how to respond to this ongoing critical economic environment. Now for some actual information...
Interest Rates: December treasury bonds closed at 13219, down 11 ticks after trading as high as 13325 during the session. Yields hitting record lows after Thursday’s surprise economic data questioning sustainability of a global recovery. A European Central Bank policy maker said that the “institution will keep emergency lending measures in place until next year”, to ensure banks are not victims of liquidity shortfalls. Also on Thursday, James Bullard, President of the St. Louis Missouri Federal reserve Bank said a new round of quantitative easing in the form of treasury purchases may be in order if “inflation continues to decline”. Next week’s auctions of $109 billion in notes and inflation-indexed securities will be watched closely. The current level of U.S. administration spending remains a concern and at some point the government may have to “pay up” for money which could prompt higher interest rates and lower bond prices. We continue to suggest buying puts on treasury bonds.
Stock Indices: The Dow Jones industrials closed at 10213.62, down 57.59 and has now lost 2.1% for the year. The s&P 500 closed at 1,071.69, down 3.74 with the Nasdaq gaining 81 points to close at 2179.76. The Labor Department report on Thursday showing an increase of 12,000 first time unemployed to 500,000 let the way for investor sentiment turning negative. The Philadelphia Fed’s report of a contraction in manufacturing for the first time in a year also played a roll on the negativity. Pressure on equities and recent gains in treasury prices indicates an ongoing “transfer of funds” from equities to relative safe havens. We once again suggest the implementation of hedging strategies. We can assist investors with various hedging programs.
Currencies: The September U.S. dollar index closed at 8316, up 62 points against losses in the Euro of 113 points to 12709, the Swiss franc 22 points to 9660, the British Pounds 63 points to 15530, the Canadian dollar 84 points to 9532, and the Japanese yen 60 points to 11663. A German official indicated that the ECB would maintain emergency lending support for euro-zone banking institutions through the next year. That signalled concern that problems remain in the euro-zone countries and that the debt crisis in some of its members remains critical. We continue to favor the Swiss franc in this group and would add to long positions on any further declines.
Energies: The October crude oil contract closed at $73.82 per barrel, down another 95c and is within the range we suggested a few weeks ago between $75 and $70 per barrel. At the time of our recommended range crude was trading around $82 per barrel but our assessment of global supply/demand dictated our recommendation. The American Petroleum Institute reported U.S. fuel consumption rose 3.8% in July but was largely ignored since much of the increase was tied to consumption of diesel fuel. We continue to feel crude will remain under pressure tied to global supply/ demand and should our position change, our clients will be advised by email.
Copper: September copper closed at $3.2910, down 2.75c tied to negative U.S. economic data. The early week rally in equities carried copper prices as high as $3.41 but the negative reports on jobs and business conditions prompted the selling. We remain bearish on copper based on our assessment of a continued U.S. and global recession.
Precious Metals: December gold closed at $1,228.80 per ounce, down $6.60 after touching a 7 week high on global economic concerns. The Thursday close was the highest since June 30th after the increase in first time unemployment to 500,000. The economy remains dominant in the minds of investors and gold has historically been a safe haven in times of economic uncertainty. We could see gold momentum continue pushing prices close to $1,300 per ounce. Individuals can purchase physical precious metal coins through our website in small or large increments. There are a number of programs available. December silver closed at $18.041 per ounce down 34c. October platinum lost $13.60 per ounce to close at 1513.90 while September palladium lost $9.45 per ounce closing at $476.20. We continue to favor silver at or below $17 per ounce.
Grains and Oilseeds: December corn closed at $4.36 ¼ per bushel, up 7c on strong weekly export sales. We favor the long side of corn on dips but with stops. The drought in Russia could continue to effect grain markets. December wheat closed at $7.12 per bushel, down 2 1/4c on a projected larger than expected Canadian wheat crop which could mediate the drought ravaged Russian crops. We suggest the sidelines since the price swings would take out any stops either way. November soybeans closed at $10.11 per bushel, down 8 1/4c tied to high yield expectations but concerns over a disease affecting beans. Higher yield potentials offset the concern and prices declined. We continue to favor the long side of beans on dips but with stops.
Coffee, Cocoa and Sugar: September coffee closed at $1.8155 per pound, up 4.25c the highest price for the nearby since December 1997. Tight supplies for the arabica beans prompted heavy buying. Producer selling is light with demand for the specific quality high. Roasters that had been awaiting price declines are having to pay up now. We could see further price gains. December cocoa closed at $2,827 per tonne, down $65 on speculative selling. Long liquidation tied to expectations of increased production from Ivory Coast one of the features to the selling. We prefer the sidelines. October sugar closed at 19.95c per pound, up 2.4% tied to tight supplies and the reshuffling of deliveries and the U.S. loosened rules. We prefer the sidelines but prices could move to between 22 and 25c per pound basis the October contract. Buying should be considered only by well capitalized traders but again, only with stop protection.
Cotton: December cotton closed at 83.55c per pound, down 59 points tied to the strong dollar and general commodity selling. We prefer the sidelines.
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.