A number of elements factored into this past week's market action, not the least of which was the ongoing saga of the Greece debt crisis. U.S. economic data was mixed, but the handwriting is on the wall that there is no economic recovery, even though May’s leading economic indicators were positive. Market participants viewed the report as a blip and could not offset the ongoing labor situation or the University of Michigan consumer sentiment decline to 71.8 for early June. The confidence index is clearly reflecting the general malaise in the country with more than 17 million people out of work or having taken jobs paying much less than positions lost. The overriding concern is how the economy can improve while so many consumers are out of work and living hand to mouth.
On Friday the International Monetary Fund, in its regular assessment of global economic prospects, issued an ominous report stating that "bigger threats to growth had emerged" since the April report. They cited the Euro Zone debt crisis and warned Washington as well on budget deficit concerns. This week the proposed bailout of Greece will be the dominant factor with the economic data coming in a close second. Also keep a close watch for the anticipated change by Moody’s Advisory service of Italy’s debt, another potential sign that the Euro is in trouble.
Interest Rates: September treasury bonds closed at 12528, down 15/32nds after trading as high as 12615 on concerns over Greece and the statements by France’s Sarkozy and Germany’s Merkel pondering a resolution to the problem. The rally in equities on Friday also prompted the move of money from the relative safety of Trasuries back to equities.. We do not feel any resolution of Greece’s immediate debt problem will solve it and "rumblings" of other EuroZone country problems are emerging i.e. Moodys potential downgrade of Italy’s debt. We expect bonds to remain in a trading range and have programs that could prove beneficial to investors.
Stock Indices: The Dow Jones industrials closed at 12004.38, up 42.84 and posted the first weekly gain since April. The S&P 500 closed at 1271.50, up 3.86 while the tech heavy Nasdaq lost 7.22 points to close at 2616.48 tied mostly to the drop in RIM stock. Volatility increases on a quadruple "witching" day where the June contracts across the board expired. For the week the Dow picked up 52.45 points, the S&P 500 0.52 points but the Nasdaq lost 27.25 points. We continue to warn against "optimistic" expectations for both the U.S. economy and the equity markets and suggest implementing hedging strategies immediately. We can provide assistance in developing hedging programs for holders of large equity and bond portfolios.
Currencies: The September U.S. dollar index closed at 7544.5, down 77.9 after early week gains tied to the Sarkozy-Merkel comments on resolution of Greece debt. That prompted the buying in Euro currencies and profittaking in the dollar. The September Euro gained 173 points to close at 14276, the Swiss Franc 24 points to 11795, the British Pound 71 points to 16158, the Japanese yen 98 points to 12498, the Canadian dollar 65 points to 10177, and the Australian dollar 110 points to 10492. Heavy shortcovering on Friday was the main feature in front of the weekend. The expectation of a resolution of Greece’s debt problem is still uncertain and the riots tied to Greece’s implementation of a severe austerity program remains of concern. We could see a reversal and new dollar strength if the resolution fails to materialize or if the threat of a Moodys downgrade of Italy’s debt also develops. Stay on the sidelines for now but look to buy dollars on any change in the "positive momentum" for the Eurozone situation.
Energies: July crude oil closed at $93.01 per barrel, down another $1.94 tied to reduced expectations for global economic growth and declining demand for energy products. We continue to believe there is no U.S. economic recovery nor is the concern over the eurozone countries debt resolved to any degree. We continue to believe crude oil prices will decline to the $80 per barrel level with some brief corrections in between tied possibly to geopolitical events.
Copper: September copper closed at $4.11 per pound on Friday in late trading, losing one point or 0.45% after trading as high as $4.17 during the session. Concerns over Greece’s debt crisis and whether or not the resolution proposed by Frances Sarkozy and Germany’s Merkel will prove successful. We do not believe the "temporary solution" offered will change anything if the rioting in Greece fails to allow the austerity programs to be implemented. Sell on any rallies since our expectation of the realization that a global recession persists will prompt further declines in demand.
Precious Metals: August gold closed at $1,539.10 per ounce tied to the selling in dollars on the expectation of a resolution of a Greece debt crisis. Heavy shortcovering in euro currencies and profittaking in the dollar also accounted for the strength in metals. July silver closed at $35.75 per ounce, up 19c but for the week silver lost 1.6%. We favor the sidelines with metals remaining in a trading range beneficial only to traders not investors. July platinum closed at $1,752.10 per ounce, down $8.60 with September palladium losing $18.10 per ounce to $745.40. The continuing concern that Japanese auto plants and parts facilities will continue to impede production lessens the need for the white metals which are used in auto catalytic converters. Stay out for now.
Grains and Oilseeds: December corn closed at $6.60 per bushel, up 7c on shortcovering in front of the weekend but posted a weekly decline. We like the long side of corn based on expected supply tightness.
December wheat closed at $7.53 ¼, down 1/2c also on shortcovering after selling off sharply early in the week. We prefer the sidelines. November soybeans closed at $13.33 ¼ per bushel, down 17c on improved crop outlook even against the selloff in the dollar. The U.S. Midwest crop is improving and yield potential forecast as better than earlier expected. We prefer the sidelines in beans.
Cattle & Hog report: August live cattle closed at $1.1020 per pound tied to the recent surge in cash prices. Stronger packer margins are indicative of better demand in the forecast. We like the long side of cattle. August live hogs closed at 94.85c per pound, down 0.375c on long liquidation after recent gains. August hogs had gained nearly a nickel per pound during the previous ten days and a correction was in order. Also futures moved to a premium to cash bids and that also was a factor in Friday selling. We prefer the sidelines in hogs
Coffee, Cocoa and Sugar: September coffee closed at $2.5305 per pound, down 8.1c after recently making a 14 year high. Brazil’s Agricultural ministry predicts coffee output will decline by 9.5% but Mays exports were up 3.7%. We favor the sidelines in coffee until it re-establishes its bullish trend after the correction is completed. September cocoa closed at $2916 per tonne, up $30. Concerns over cocoa deliveries to Ivory Coast fell 48% in June from the previous year. Predictions that global production, however, will increase by 10.9 for the 2010-11 period could put pressure on prices. We still like the long side of cocoa. October sugar closed at 25.29c per pound, up 36 points on export delays from Brazil and the weak dollar on Friday. We prefer the sidelines.
Cotton: October cotton closed at $1.2961, per pound, up 2 15c mostly against the weak dollar. Selling in cotton has been dominant after it made the high of $2.27 per pound in March, the highest in 140 years of recorded price history. We favored the short side for some time and still see some downside potential but a correction is in order so we moved to the sidelines.
John L. Caiazzo