The ongoing conflict in Libya as well as protests in other countries specifically Syria where soldiers are reported to have killed protestors permeate the airwaves and affect markets from energy to financials. The devastating earthquake and tsunami in Japan and reports of nuclear fallout and indications that food and water are being contaminated are also of great concern. Global economic worries such as for Portugal and current protests in Great Britain over reductions in health benefits and taxes could also play a part in global market action. For those and other reasons we are being conservative in our approach to market recommendations. Now for some information that hopefully will guide this weeks trading for our clients. Any changes of opinion will be emailed to clients.
Interest Rates: June Treasury bonds closed at 12008, down 16/32nds with yields moving higher on concerns that geopolitical events could impact the global economic recovery. A statement by Philadelphia Fed President Plosser said that with the economy improving the Fed should eliminate further monetary stimulus. The Dallas Fed President, Richard Fisher, is opposed to further purchase programs by the central bank after it expires in June.The sale of 10 year inflation indexed debt was well taken on speculation that the U.S. economic growth could push up consumer prices. Something we have been indicating based on the recent rally in basic commodities. Concern in some quarters has returned to the burgeoning budget deficit and that could prompt higher interest rates. We would add to put positions or bond shorts on any rally but with stops.
Stock Indices: The Dow Jones Industrials closed at 12220.59, up 50.03 and up 3.1% for the week. The S&P 500 closed at 1313.80, up 4.14 and also gained 3.1% for the week. The tech heavy Nasdaq closed at 2743.06, up 6.64 and gained 3.8% for the week. Positive earnings and economic news prompted the return from the relative safety of treasuries, where money is "parked", to the equity markets. The Commerce Department reported U.S. GDP grew by 3.1% in the 4th quarter of 2010, up from the earlier estimate of 2.8%. The revisions were in line with economist expectations. Geopolitical concerns put some pressure on equities late in the day. We continue to suggest implementing hedging strategies, something we can assist with for investors with large portfolios.
Currencies: The June U.S. dollar index closed at 7638, up 49.2 points after the Philadelphia Federal Reserve President, Charles Plosser said that the Fed should "aggressively tighten monetary policy within a year". He said the Fed should "hike interest rates in the not-too-distant future." His statement prompted selling in treasuries and buying of dollars. The currency losses included the June Euro, 113 points to 14051, the Swiss Franc 147 points to 10882, the June British Pound 92 points to 15999, the June Japanese Yen 71 points to 12289, and the June Canadian dollar 49 points to 10174. The Australian Dollar managed a gain of 31 points to 10156. The Euro selling pressure came from another downgrade of Portugal’s credit rating. While we could expect higher rates due to the "introduction" of inflation prompted by the extraordinary gains in basic commodities, we could see renewed pressure on the U.S. dollar tied to continued unemployment and an increasing budget deficit if higher rates do not materialize.
Energies: April crude oil closed at $105.40 per barrel, down 20c but remained sharply higher on continued Middle East tensions. Political unrest in Bahrain, and the ongoing efforts to obviously topple the Qaddafi regime along with Syria killing some protestors could keep crude prices above $100 per barrel. However, the economics of crude, what we feel is a continued global recession, and adequate supplies, could see prices decline to our ultimate goal of between $70-75 per barrel. Retail investors should stay out. This game is for the "big boys" on the floor, at financial institutions, and in the energy business.
Copper: May copper closed at $4.4190 per pound, down 55 points even as U.S. economic data was positive and equity markets were strong, a condition usually translates to higher crude prices. However, with the U.S. housing market still in "shambles" with new home construction lower than expected, we expect copper demand to decline. The "wild card" could be the amount of copper necessary to rebuild parts of Japan after the disastrous damage caused by the earthquake and tsunami. We expect prices to decline regardless and would buy put options on any rally in prices.
Precious Metals: June gold closed at $1,431.50, down $4.90 against the dollar strength in which it is denominated. The ongoing geopolitical events have carried gold to current levels but Friday’s dollar strength offset those concerns and gold sold off. July silver lost 11.3c per ounce to close at $37.28 per ounce following gold but over time silver has outperformed gold percentagewise. On Friday at one point on my charts, gold was up 0.58% while silver was up 3.8%. The advantage is clearly in favor of silver even though the pundits on TV continue to promote gold purchases. We continue to prefer silver as the hedge against global conflict and inflation. June palladium lost $1.85 per ounce to close at $750.40 while April platinum lost $14.40 to close at $1,745.60 per ounce. For the week palladium was up 2.6% and platinum gained 1.3%. We have favored palladium over platinum for some time and our readers were able to take large profits, if followed, on the long palladium short platinum spreads.
Grains and Oilseeds: May corn closed at $6.89 ½ per bushel, down 13c against the strong dollar and in a correction after recent sharp gains tied to tight U.S. corn supplies. We like corn but prefer other opportunities. May wheat closed at $7.33 ¼ per bushel, down 8 1/4c also tied to the dollar strength but the underlying concern that increases in global production could stall further price gains. We prefer the sidelines in wheat. May soybeans closed at $13.58 ¼ per bushel up 3 3/4c even as the strength in the dollar impacted other commodities. Brazilian harvest pressure could prompt some overhead resistance so we would be on the sidelines. Higher export sales reported by the USDA prompted buying of Rough Rice contracts. We continue to favor the long side of rice bearing in mind the minuscule gains for rice against the corn, wheat and soybean contracts.
Coffee, Cocoa and Sugar: May coffee closed at $2.6960 per pound up a penny and remains bullish tied to tight global supplies but inventory increases of late could prompt further profittaking. Stay out for now. May cocoa closed at $3229 per tonne, down $13. We would avoid cocoa due to Ivory Coast concerns where smuggling is rempant for beans, and the holdover President threat to seqize cocoa exporters beans if not exported by the end of March to satisfy unpaid taxes. Stay out for now. May sugar closed at 27.86c per pound and is on our no interest list at current prices in the 30c to 25c range. However the current correction from the highs could provide a buying opportunity on further price declines tied to tight supplies.
Cotton: May cotton closed at $2.04.49, down 4.33c but was still up 537 points or 2.7% for the week. The higher dollar and a correction from recent highs prompted the long liquidation and profittaking. We prefer the short side of cotton since hoarding continues in many parts of the growing areas, specifically China. With our continued estimate of a global economic recession and reduced demand we could see prices back to the $1.50-1.75 level. Buy puts.
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.