Futures market overview ahead of anticipated volatility

With elections looming for Tuesday, I do not expect anything other than position squaring early in the week. The current party in control of both houses of Congress for the past four years and the White house as well for the last two is in jeopardy of losing one or both Congressional houses. Should that occur and the Republican party seize control it would leave President Obama a "lame duck" for the balance of his Presidency.

Because the Republican party would probably not have the power to overturn his veto on various measures, it would be difficult to push through any legislation to correct the current "economic epidemic." We refrain from any political opinion and await the decision of the electorate. However, with the continued unemployment levels nationwide, we see no reason for optimism no matter who wins. There is no hope in sight for job creation, which, in my opinion, is a misnomer.

The labor situation could be tied to the housing and mortgage debacle for a number of reasons. Banks are not foreclosing and potential buyers will not buy knowing there is a "shadow inventory" that will at some point come out. The only answer I see is to declare a six month moratorium to allow people to find jobs. Then allow those who were successful to start making monthly mortgage payment attaching the missed payments to the back of the mortgage. Those who were not successful should be foreclosed, properties sold at whatever price they can get, and form a base where potential buyers will now believe the bottom has been established and they will buy homes.

That will create the opportunity for return to work for building contractors, truckers, producers of products needed to build a home, electrical workers, metals and glass workers and all the industries tied to homebuilding. That, in my opinion, is the only way to restart the economy and start to put people (consumers) back to work. Now for some basic news…..

Interest Rates: December treasury bonds closed at 13030, up 23 points as rates are holding at all time lows tied to the prospect of further Fed easing. This coming weeks events include a mid term election where the power in congress may shift and alter key administration positions. The Labor Departments monthly employment report is also a market moving event. We are considering recommending shorting treasuries on the basis that rates should remain low and that bond prices may be up against a "glass ceiling". I would start to buy some forward puts.

Stock Indices: The Dow Jones industrials closed at 11118.49, up 4.54 points and gained 0.1% for the week. The S&P 500 closed at 1183.26, down 0.52 points while the tech heavy Nasdaq gained 0.04 points to close at 2507.41. For the week the S&P was unchanged and the Nasdaq managed a 1.1% gain. The markets responded to mediocre economic data that did not produce any definitive direction for the U.S. economy and the attention to the new week and months events kept traders on the defensive. The Commerce Department reported GDP increased at a 2% annualized rate in the third quarter after a 1.7% second quarter. The Institute for Supply Management reported a gain of 0.2 points to a 60.6 reading in October while economists had expected a drop to 58. That provided some support to the market but was offset by the negativity of the University of Michigans consumer sentiment index which was revised downward for October to 67.7 against analyst expectations of an upward revision to 68. We continue to believe that there is no recovery, slow or otherwise, and that the U.S. equity markets are in a precarious position. We once again strongly suggest implementing hedging strategies.

Currencies: The December U.S. dollar index dropped to 7716.5, down 33.8 points as expectations for further U.S. Federal Reserve rate easing weighed on the dollar. The December Euro lost 31 points to close at 138880 on negative sentiment for both currencies against the other majors. The December Swiss franc lost 24 points on profittaking and closed at 10151, still premium to the U.S. dollar. Gainers were the British pound 68 points to 160313, the Japanese yen 91 points to 12429, the Canadian dollar 9 ticks to 9793, and the Australian dollar 13 points to 9742. We prefer the sidelines in currencies awaiting results of the new weeks data and election results

Energies: December crude oil closed at $81.43 per barrel, down 0.75c on the dollar and Euro weakness and the drop in U.S. consumer sentiment which plays a role in demand for energy. We prefer the sidelines but still see eventual price declines to the $75.00 per barrel level for crude based on our view of continued global economic instability. Ample supplies also a factor in our opinion.

Copper: December copper closed at $3.7460, down 4.15c tied to delays in any news related to the possibility of further Fed easing or to the amount of such action by the Fed. Based on our assessment of the U.S. labor and housing situation, demand for copper should decline and put pressure on prices. We remain bearish.

Precious Metals: December gold closed at $1,359.80, up $17.30 on renewed interest by investors in front of next weeks Federal Open market Committee meeting and the weak dollar and Euro. The disappointing third quarter GDP was also a factor. December silver closed at $24.735 per ounce, up 86c following gold while January platinum gained $15.10 to $1,707.10 and December palladium gained $18.05 to close at $647.50. We could see further advances in precious metals but feel the markets may have gotten ahead of themselves in a sort of "rubber band" stretched price move.

Grains and Oilseeds: December corn closed at $5.82 per bushel, up 3c on spec buying and supply/demand. Fresh news is needed to get prices moving again and while market sentiment seems to point to lower yields and production forecasts from the USDA, the trade is expecting reduced demand. We are awaiting the next USDA crop update due on November 9th and remain on the sidelines for now. December wheat closed at $7.17 ¼ on Friday, down a penny but gained 46 1/2c on the week. Slight profittaking after crop fears pushed prices sharply higher during the week was to be expected. We prefer the sidelines for now pending further news. November soybeans closed at $12.40 ¼ per bushel, down a quarter penny but higher on the week tied to strong exports. We continue to like soybeans but posted a recommendation to take some profits off the table. We would not add at current levels and await further news.

Coffee, Cocoa, Sugar: December coffee closed at $2.0230 per pound, down 1.15c after earlier climbing to $2.0345 during the session and substantially higher early in the week. Rainfall in India expected to delay harvests and add to global supply shortages. The Colombian, Central America and Brazil production cuts and shipment delays prompted by poor weather also a factor in the recent strength. We prefer the sidelines. December cocoa closed at $2800 per tonne, up $3.00 with expectations that prices could find additional support from the Nigerian exporters refusal to buy beans at farmers posted prices. That could support cocoa and prompt shortcovering. We prefer the sidelines. March sugar closed at 29.17c per pound and new 8 month highs. The weak dollar and expectations of a smaller Australian harvest also a factor. We prefer the sidelines here as well but would not consider shorting.

Cotton: December cotton closed at $1.2526 per pound, up 3.58c on continued supply worries and growing global demand. Earlier in the week December traded as high as $1.305 per pound. Heavy Chinese demand could push prices to the $1.35 level in short order. Recent sharp price gains attributable to bad weather destroying crops and harvest delays. We like cotton but we would use stops on any new buying.

About the Author
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 to which he introduces his clients.

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