Friday the 13th normally passes without incident, but last Friday was different for the countries whose credit ratings were downgraded by Standard & Poors. The markets started to absorb the ramifications of such rating downgrades on Friday but the real test of what they mean could come as early as Monday in Europe and carry over to Tuesday's U.S. markets (closed in honor of Dr. Martin Luther King on Monday). Because of the global implications of the credit rating downgrades, we will have to temper our comments accordingly. Now for some actual information...
Interest Rates: March Treasury bonds closed at 14500, up 1 14/32nds on reports that the Standard and Poors rating agency lowered the credit ratings of some Euro countries. The ratings of Austria, Malta, Slovakia, and Slovenia by one notch, stripping France and Austria of rare triple A ratings that were tied to "their ability to support the efforts to rescue struggling euro zone members". S&P downtraded by two levels the credit ratings of Italy, Spain, Portugal and Cyprus with Portugal and Cyprus lowered to junk status. First time unemployment on Thursday rose by 24,000 to a seasonally adjusted 399,000 for the week ended January 7th according to the U.S. Labor Department. Treasuries had rallied early in the session after the U.S. trade deficit reportedly widened by 10.4% in november to $47.8 billion, after four months of narrowing according to the Commerce Department. This was the largest trade gap since June and the largest increase since May of last year. We could see further price gains for treasuries as prices broke through overhead technical resistance. This increases the trading range we had indicated in early commentaries. We are now approaching the price and yield area where buying put options are increasingly appropriate.
Stock Indices: The Dow Jones industrials closed at 12,422.06, down 48.96 tied to both the decline in profits by one of the largest banks, J.P. Morgan Chase & Co. and the downgrading of credit for some Euro countries by the rating agency, Standard & Poors. The S&P 500 closed at 1289.09, down 6.41 but gained 0.9% for the week. The Nasdaq closed at 2,710.67, down 14.03 but for the week still managed a gain of 1.4%. An early report of an increase in consumer sentiment failed to offset the JP Morgan news. We could see further market declines Monday night in Europe as the results of the rating cuts is absorbed by the financial community. We once again strongly suggest implementing hedging strategies for holders of large equity positions.
Currencies: The March U.S. dollar index closed at 8172.5, up 68.9 after Standard & Poors lowered the credit ratings of a number of European countries. The Euro closed at 12672, down 160 points with other losses suffered by countries whose rating was not cut. The March Swiss Franc lost 1.13c to $1.0494, the Japanese yen lost 33 points to 13004, the March British pound 38 points to 15293, the Canadian dollar 46 points to 9755, and the Australian dollar 38 points to 10222. The swift to the relative safety of the U.S. dollar during tumultuous times is normal but we will have to wait to see if the dollar can continue to gain ground globally. Meanwhile we remain convinced that the Euro will suffer losses both the membership and in price. Hold put positions.
Energies: February crude oil closed at $98.70 per barrel, down 40c tied to the U.S. dollar gains and easing concerns of an Iranian oil embargo which had threats by Iran of a closure of the Straits of Hormuz. We could see further back and forth trading but our overall view is that based on global uncertainties and recession, demand should decline further pushing prices lower.
Copper: March copper closed at $3.64 per pound, down a penny against the dollar rally but held up tied to reports that China could adopt more accommodations to monetary policy. Monetary easing by the largest consumer of copper could lead to expanded economic activity creating additional demand for copper. We continue to favor the short side of copper on any price gains based on our expectation for continued dollar strength and Euro weakness along with a global economic slowdown.
Precious Metals: February gold closed at $1,630.80 per ounce, down $16.90 but in later trading cut the loss to $8.40 with prices around $1,639.30. March silver closed at $29.52 per ounce, down 60c but after the official close managed to recover to $29.7250, cutting the days loss to 39.90c. The strong dollar and concern over the Standard & Poors cut in the credit ratings of a number of countries prompted the dollar strength. April platinum closed at $1,488.80 per ounce, down $11.30 and March palladium closed at $635.05 per ounce, down $6.20. We remain sidelined in precious metals.
Next page: A look at grains, meats and softs
Grains and Oilseeds: March corn closed at $5.99 ½, down 12 cents tied to the equity market losses.March wheat closed at $6.02 ¼, down 2 3/4c tied to beneficial rains in Argentina and Southern Brazil but a purchase by Egypt of 180,000 metric tons helped prices hold with minor losses. However, March soybeans lost 24 1/4c to close at $11.58 1/4c after Thursdays bearish USDA report as stocks were reported higher than expected. We were "pushed" to the sidelines in soybeans after having been bullish for some time. We would await further fundamental developments before taking any new positions.
Meats: February Cattle closed at $1.22475 per pound, up 225 on shortcovering tied to strong demand for protein products. We continue to favor the long side of cattle. February hogs closed at 85.6c per pound also tied to demand. We continue to favor cattle over hogs.
Coffee, Sugar and Cocoa: March coffee closed at $2.2475 per pound, down 9.15c tied to better harvest results from Brazil. Previous forecasts pushing coffee prices higher were tied to expected weather damage. We prefer the sidelines for now. March cocoa closed at $2,269 per tonne, down $57 on reduced consumption reports from Europe. Tighter supplies had prompted buying but consumption expectations failed to materialize and prices declined. We like cocoa but would hold current call positions and not add for now. March sugar closed at 23.8c per pound, up 53 points on tight supplies. We continue to favor the long side of sugar but only through the purchase of call options for now.
Cotton: March cotton closed at 95.47c per pound, down 22 points as estimates of just how much impact Chinese buying will have in the face of global economic concerns. We continue to suggest cotton may have bottomed after last years devastating price declines. We would only use call options from here.
John L. Caiazzo