Tax deal impacts futures and commodities

The delay in passing the Bush tax cuts extension currently being debated in Congress is causing consternation within the business community as well as among the investing public. The main argument from the detractors is the extension of the tax rate for the 2% wealthiest individuals. We will have to see how it plays out before offering any definitive recommendations relating to the financials. President Obama brought in the "heavy guns" with former President Bill Clinton making the case for going forward with the extension as agreed to by Obama and the Republicans.

The Bush tax cuts have been in effect for a few years now and the public has gotten used to them. Unfortunately, the increased spending by the four years of Democratic control over both houses of Congress has added significantly to the budget deficit. The argument against extending the tax cuts, according to some Democrats, that they will create a $700 billion addition to the deficit and they want them to expire. That logic eludes me because only continued rampant spending will credit that size deficit increase. The status quo will allow businesses to examine their finances and enable them to hire people with the knowledge their "tax bill" will not increase.

The other negative, I believe, against businesses hiring is the "ObamaCare" health plan which is also a great concern to small businesses. In conclusion it would appear that an impasse exists and we will have to see how it plays out. Our opinion remains unchanged. Extend the tax cuts, increase unemployment benefits, and dump "ObamaCare in favor of retaining and possibly expanding Medicare. Forcing people to purchase health care when they are suffering from unemployment, lower wages from less paying jobs taken in desperation, and barely making ends meet and fining them if they don’t makes no sense to me.

Now for some actual information to somehow benefit my readers.

Interest Rates: March treasury bonds closed at 12119, down 17 points as the U.S. trade and consumer sentiment reports indicated an improved economic outlook. Money moved back from the relative safety of treasuries, something I have been forecasting, to equities. The Reuters/University of Michigan index of consumer sentiment rose from 71.6 in November to 74.2 for early December. The Commerce Department reported the trade deficit narrowed to $38.7 billion for October while economists had expected an expansion to $44.5 billion. Most commodities traded lower on Friday after China additional action to ease inflation by possibly raising interest rates. That would strengthen their currency and negatively impact the U.S. currency and commodities. China ordered their banks to increase reserves in order to reduce lending capabilities and negatively impact commodities and other raw materials. We could see a correction early in the week for treasuries but our posture turned to bearish some weeks ago.

Stock Indices: The Dow Jones industrials closed at 11410.32, up 40.29 and gained 0.2% for the week. The S&P 500 closed at 1240.40, up 7.40 for a 0.6% weekly gain. The Nasdaq closed at 2,637.54, up 20.87 and for the week gained 0.8%. Trading was subdued thanks to the question of whether or not the Bush tax cuts would be extended. President Obama agreed to extend them but some Democrats are threatening to boycott the vote and the President then tempered his agreement. We continue to suggest implementation of hedging strategies.

Currencies: The March U.S. dollar index closed at 8042, down 6 points. The recent rally, however, was tied to President Obama’s agreed to extend the Bush tax cuts. The March Euro closed at $1.32240, down 50 points while the March Swiss Franc gained 26 points to close at $1.0201. The March British pound also closed higher at $1.5790, up 51 points while the March Canadian gained 29 points to 9893 and the Australian dollar gained 24 points to 970. The March Japanese yen lost 29 points to close at 11932. We continue to favor the sidelines until which time as a Congressional vote is decided on the tax cuts.

Energies: February crude oil closed at $88.34 per barrel, down 54c while February heating oil lost 97 points to close at $2.4734 and unleaded gasoline lost 1.49c to close at $2.3060. Natural gas also lost ground on Friday closing at $4.417 per MBTUs, down 7 points. We would await the Congressional vote before putting on any commodity positions this week. Also, the Chinese action of ordering the banks to increase reserves was also viewed as a negative for raw materials.

Copper: March copper closed at $4.1195 per pound, up 3.25c and closing in on a new contract high. We would avoid any new positions on copper although our stance is bearish tied to our expectations of a weakening U.S. economy.

Precious Metals: February gold closed at $1,384.90 per ounce, down $7.90 after the positive U.S. trade data and the consumer sentiment index increase. The People’s Bank of china raised bank reserve requirements by 50 basis points, it’s sixth increase this year to help curb its inflationary trend and that was also a negative for gold, which is viewed as an inflation hedge. March silver closed at $28.695 per ounce, down 12.2c following gold. January platinum lost $3.60 per ounce to close at $1,675.30 while March palladium lost $8.90 per ounce to close at $732.70. We favor the sidelines for all except astute traders.

Grains and Oilseeds: March corn closed unchanged at $5.74 ¼ per bushel as traders awaited next weeks weather report on Argentina, which had experienced extremely dry conditions. We prefer the sidelines.

March wheat closed at $7.75 ½, per bushel, down 13c on profittaking and after the government raised supply forecasts. We prefer the sidelines in wheat as well. March Soybeans closed at $12.82 ½ per bushel, down 8c with supplies matching analyst expectations. We prefer the sidelines here as well even though soybeans are our favorite in the group.

Coffee, Cocoa, Sugar: March coffee closed at $2.0960 per pound on Friday with March cocoa closing at $2887 per tonne, and March sugar settling at 29.16c up 3 ticks. We could not obtain information on these markets from our usual sources probably tied to the upcoming holidays.

Cotton: March cotton closed at $1.3697, giving back some of its previous gains. The USDA lowered the 2010-2011 stocks by 200,000 bales from last months projections and that could prompt some additional buying early in the week. However, after the recent runup in prices, we would prefer the sidelines.

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.

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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