The direction of global markets this past week was influenced again by the European debt situation. The proposals forthcoming for the "bailout" of Greece do not, in my opinion, address that whatever they agree to will not change that Greece will be in debt to the tune of 120% of its GDP when approved. That situation is untenable and assumes that the Greek public will allow it based on the severe constrictions and austerity programs. In the background are the problems with Italy, Portugal and Spain which have not yet been addressed. The announcement that China would be willing to buy up debt in the multi-100 million dollar range is insignificant when related to the trillion-dollar program. Their demands tied to that offer may not be acceptable to the EU and that would prompt continued market gyrations in the coming weeks. Part of that agreement reached will include banks taking a 50% writedown of Greek debt and I cannot foresee all the banks agreeing to that size "haircut". With the magnitude of the global economic problems we once again have to temper our comments and opinions in order to accommodate the various elements and potential results of the forthcoming decisions. Now for some actual information that hopefully will help our readers...
Interest Rates: December treasury bonds closed at 13628, up 1 and 15/32nds on shortcovering after recent heavy selling as money had moved to equities. The assumption that the resolution of the Greek debt crisis is at hand and the announced "assistance" from China has led to massive movement of funds from the relative safe haven of treasuries back to the equity markets. The Thomson/Reuters University of Michigan release of the October consumer sentiment index rising to 60.9 against the preliminary reading of 57.5 was also a factor in the earlier gains in equities. On Friday the U.S. government reported consumers saved less and spent more in September with personal income rising 0.1% and sonsumer spending rising 0.6% according to the Commerce department. The financial markets breathed a "sign of relief" at the report of efforts to relieve the euro zone’s debt crisis but as I indicated earlier, the proposals fall short of a true resolution in my opinion. We continue to view treasuries as a trading affair and it would seem a corrective rally after recent selling would be in order.
Stock Indices: The Dow Jones industrials closed nearly unchanged Friday gaining only 22.56 points to 12,231.11 but for the week posted a 3.6% gain. The S&P 500 closed at 1,285.09, up 0.5 points but gained 3.8% for the week. The Nasdaq closed at 2,737.15, down 1.5 points but gained 3.8% for the week. Friday’s action saw funds move from equities to some degree on profittaking to treasuries on a correction after the safe haven’s sharp price decline and increase in yields. Since we are of the opinion that the debt crisis engulfing Europe will not be resolved without a contraction in the number of countries in the Euro, our suggestion is to manage portfolios and reduce exposure of companies dealing with certain of the Euro countries. We also continue in our recommendation of implementing hedging strategies to mitigate the kind of sharp selloff suffered in August.
Currencies: The December U.S. dollar index closed at 7518.5, up 17.4 on a correction after the early week heavy selling of dollars against the Euro and other currencies. The December Euro closed at 14148, down 53 points, the swiss Franc 11610, down 32 points, the Canadian dollar 10053, down 28 points and the Australian dollar 10649, down 9 points. The Japanese yen managed a gain of 35 points to 13210, while the British pound gained 2 little ticks to close at 16108. The back and forth action in the dollar is a result of the ongoing debt crisis reporting and we could continue to see wide price swings. Treat as a trading affair but at the 7500 level we like the dollar on the basis of our expectation of further difficulties in resolving the European debt crisis.
Energies: December crude oil finished at $93.49 per barrel, down $4.70 on profittaking after recent strength tied to optimism of a stronger U.S. economy which would supposedly improve demand. The development of a plan to resolve the current Euro debt crisis also a factor in the optimism. We do not expect a definitive resolution and would look to short crude oil anywhere from here to the $95 level. However, an early storm expected for the East coast could improve demand for natural gas which gained 1.64c on Friday to close at $3.928 per MBTUs. We prefer the sidelines in natural gas due to the level of supplies even though some carryover buying could be expected.
Copper: December copper closed at $3.72 per pound, up 2c and gained 15% for the week. The report of the estimate of China’s unofficial manufacturing PMI for October and the expected rescue package for the Euro zone as well as a strike at the Freeport McMoran Copper and Gold Inc.’s Grasberg mine in Indonesia were all contributors to the rally in copper. We had suggested some time ago to take profits on our long established shorting program and maintain our sidelines approach for now.
Next page: What's up with gold?
Precious Metals: December gold closed at $1,747.20, down 50c in pre weekend profittaking after five up days. The better than expected consumer sentiment and spending figures were negative for gold but it still managed a weekly gain of 6.8%. We could see further price gains based on technicals but we prefer the sidelines since too much of market action relies in the back and forth news reports from Europe and U.S. economic data. December silver closed at $35.29 per ounce, up 18c following gold but performed better on a percentage basis gaining 13% for the week. We have favoured silver over gold for some time. December palladium lost $1.55 per ounce to $668.35 but still posted a weekly gain of 8%. January platinum gained $10.40 per ounce to $1,651.80 and gained 9% for the week. We prefer the sidelines in metals for now pending further news from Europe.
Grains and Oilseeds: December corn closed at $6.44 ½ per bushel, up 1/2c but remains under pressure tied to week exports showing a decline of 81%. China accounted for 60,000 metric tons, down from 900,000 the prior week. We like corn but would use stops on any new positions. December wheat closed at 655 per bushel, up 1/2c tied to adequate supplies even though crops appear smaller during harvest. We prefer the sidelines in wheat. March soybeans closed at $12.35 ¾ per bushel, down 17 3/4c and was disappointing to us but tied to the reduction of export sales showing 50% less from the prior week. We would hold off any new purchases for now but hold current positions.
Meats: December cattle closed at $1.1905 per bushel, down 85 points after trading as high as $1.2105 early in the session. Profittaking could be responsible but cattle remains trendless and in a narrow range. We like cattle but need a technical breakout over $122 on a closing basis before adding to positions. December hogs closed at 86.675c per pound but remain under pressure tied to higher feed prices. We prefer the sidelines in hogs.
Coffee, Sugar and Cocoa: December coffee closed at $2.3405, down 55 points after trading as high as $2.3670 during the session. After the recent rally coffee met resistance above $2.55 and has been in a downtrend since. We prefer the sidelines in coffee but support exists around $2.25 per pound. December cocoa closed at $2752 per tonne, down $4.00 on profittaking after trading as high as $2764 during the session. The recent report by the National Confectioners Association that cocoa grindings climbed to 124,261 tonnes was positive and a 3.4% gain over year ago figures. However a larger long position by the CFTC commitment of traders report could see some additional selling in the near term. We would avoid cocoa for now. March suguar closed at 26.25c per pound, down 61 points after posting an intraday high of 27.17c. With reports from Brazil indicating better crop expectations we could see further pressure on sugar prices. Hold short positions and any new positions should be with stop protection.
Cotton: December cotton closed at $1.0437, up 5 ticks after trading as high as $1.2105 during the session. Profittaking in front of the weekend the main feature. We like the long side of cotton. Hold positions.