Attention was drawn away from the meetings in Davos, Switzerland, by the turmoil in Egypt. The concern that the violence could spread to the Suez Canal and prevent shipping where much of the West’s oil travels through. That could easily prompt crude oil prices to move over $125 per barrel and negatively affect the fragility of the global economic recovery. Another fear is that Egypt, currently an ally of the U.S. and maintaining a tepid attitude toward Israel, could be impacted by any takeover of muslim extremists. Gangs reportedly have freed those extremists from Egyptian prisons and the situation remains tenuous. We will have to see what develops and for that reason we are tempering our comments once again for geopolitical reasons. Now for some actual information...
Interest Rates: March treasury bonds closed at 12114, up 23 points as equity markets declined thanks to concerns over the turmoil in Egypt and some earnings disappointments. Treasuries are considered a safe haven for funds and we could see further price gains and lower yields early in the new week. We prefer the sidelines for now.
Stock Indices: The Dow Jones Industrials closed at 11823.70, down 166.13 on Friday tied to the civil unrest in Egypt. U.S. GDP was also a cause for the selling having come in lower than expected. The S&P 500 closed at 1276.34, down 23.20 while the Nasdaq lost 68.39 points to close at 2686.89. For the week the Dow lost 0.4%, the S&P 500 0.5%, and the Nasdaq 0.1%. We continue to view the U.S. economic as in a recessionary grip regardless of the rhetoric emanating from Washington. Their continued assessment showing a recovery albeit slower than desired, makes no sense to me in the face of continued high unemployment. Implement hedging strategies before it is too late.
Currencies: The March U.S. dollar index closed at 7828 up 42.6 points as concern over the turmoil in Egypt prompted a flight to the relative safety of U.S. treasuries and dollars. The March Euro lost 1.13c to close at 13609, the Swiss Franc gained 42 points to 10619, and the Japanese yen gained 97 points to 12175. The March British pound lost 67 points to close at 15863 and the Canadian dollar lost 62 points to 9989. The Australian dollar managed a 12 point gain to close at 9885. The Euro is the currency of 17 European countries and the impact of a Suez canal closure would have a disastrous effect on European economies. We prefer the sidelines.
Energies: March crude oil jumped to $89.49 per barrel, gaining $3.85 on the concern over possible disruption of crude through the Suez Canal. March heating oil gained 4.29c to close at $2.6980 per gallon and unleaded gasoline gained 7.18c to close at $2.4850 per gallon basis the March contract. We remain sidelined.
Copper: March copper closed at $4.3730 per pound, up 3.45c on Egyptian turmoil and the 3.2% rise in the U.S. GDP. Copper is a major part of electronics, home building, construction, and any strength shown in the economy prompts shortcovering and new buying. Inventories at the LME were up 800 metric tons on Friday to 398,075 but inventories at the Shanghai Futures Exchange, where much of the Far East demand emanates, were down 1,114 tonnes. The Comex warehouses reported a gain of 1,252 short tons to 69,894 tons. We remain on the sidelines but are bearish for copper tied to our continued perception that the U.S. economy is not in recovery.
Precious Metals: February gold closed at $1,340.70 per ounce, up $22.30 on shortcovering after recent heavy long liquidation. Gold has historically been perceived as a safe haven during times of geopolitical turmoil and the deteriorating situation in Egypt warranted buying of precious metals as a hedge. March silver closed at $27.96 per ounce, up 92.9c following gold. April platinum closed up 0.1% while March palladium gained $2.50 to close at $816.00. We prefer the sidelines.
Grains and Oilseeds: March corn closed at $6.44 per bushel, down 6 3/4c on profittaking in front of the weekend and following the selling in wheat. Corn demand remains steady with an increase in demand for ethanol which kept prices from sinking further with wheat. We prefer the sidelines. March wheat closed at $8.25 ¾ per bushel, down 20 1/2c tied to the turmoil in Egypt, the worlds largest importer of wheat. We prefer the sidelines. March soybeans closed at $13.98 per bushel, down 1 1/2c on profittaking in front of the weekend and on concern over Egyptian turmoil. Favorable crop conditions in Brazil along with improving weather in Argentina was a negative and could prompt additional liquidation early in the week.
Coffee, Cocoa and Sugar: March coffee closed at $2.4585, up 85 points on declining stockpiles and expected reduced output for Arabica beans from Brazil. We could see higher prices early in the week. We would put on a few longs but use stops. March cocoa closed at $3280 per tonne, up $3.00 on continued strength for the past three weeks. Ivory Coasts President-Elect ordered a ban on exports for a month tied to disputed outcome of the November presidential election. We prefer the sidelines but traders could add to longs using stop protection. March sugar closed at 33.93c per pound, down 1 point on pre-weekend profittaking. Australia, the world’s third largest sugar exporter has undergone severe weather which caused the loss of sugarcane plants and could reduce sugar output for at least one or two years. That could produce new buying and we could recommend early week purchases but only in accounts willing and able to assume risk. Use stops on any new buys.
Cotton: March cotton closed at $1.6475, up 4.64c after trading at a new high of $2.7283 per pound. We are in new high ground not seen for 140 years. Chinese demand and the USDA’s global production cut prompted the new buying and shortcovering. Reports from India and China that "families" are hoarding cotton and filling up their homes with cotton being stored were heard this past week. We prefer the sidelines since we believe the "best" has passed us by for now.
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.