The European debt crisis influenced the global market place this past week as the on-again, off-again Greek bailout kept traders and investors concerned. Whether or not Greece is bailed out, the stigma of the rioting and that the Greek economy is unable to sustain the debt service on existing loans is not going to be solved with another bailout. The necessity to make this bailout work -- i.e. severe austerity programs as well has having financial institutions take a 60% or more haircut on the obligations -- solves nothing. With the prospect of similar problems with Italy, the third largest economy in the Euro, and Spain among others, we could very well see a Eurozone meltdown.
The question of whether or not Germany, the most solvent of the Eurozone countries, can continue to support bailouts as they occur, was also raised recently. Great Britain is already balking at continuing to fund the IMF or ECB if it means throwing money down a well with bailouts. On the basis of the ongoing questions related to the impact of the debt crisis on global economies and markets, we must once again temper our recommendations. Now for some actual information...
Interest Rates: June Treasury bonds closed at 14021, down 6/32nds tied to positive U.S. economic data but offset by the ongoing question of the Greek bailout. The reported increase in production volume at U.S. factories was better than expected in December according to the Federal Reserve. Another positive for the economy was the NAHB housing market index of 29 for February up from 25 in January, the highest level for homebuilding since May of 2007. However, the January retail sales report released during the week was less that forecast by economists but was up 0.4% for last month after a flat December as reported by the Commerce Department.With the data basically mixed, we could see continued sideways action for treasuries. We favor the prospect of continued lower rates and higher bond prices. Hold short put positions for now.
Stock Indices: The Dow Jones Industrials closed at 12949.87, up 45.79 and for the week gained 1.16%. The expectation that a Greek bailout is being worked out due to expanded austerity measures by Greece was a positive influence on equities. The better than expected U.S. economic data was also a positive. Economic data reported by France and Germany, the two largest Eurozone economies was an improved GDP and increased the possibility of an easier to fathom Greek bailout. The S&P 500 closed at 1361.23, up 3.19 and for the week gained 1.38%. The Nasdaq closed at 2951.78, down 8.07 but for the week managed a gain of 1.65%. The Dow is closing in on the psychologically important 13,000 level. With the Iranian cutoff of oil to Great Britain and France, crude price could accelerate their price gains. We continue to suggest implementing hedging strategies in the expectation that even with a Greek bailout, there are "hidden" problems with other countries within the "zone". While equities could gain further we continue to warn that any change or geopolitical events could prompt a sharp selloff in equities. Any rally should be used as an opportunity to implement hedging strategies.
Currencies: The June U.S. dollar index closed at 7984.6, up 1.1 points on shortcovering in front of the three day holiday weekend. The June Euro closed at 13165, up 18 points on continued expectations of a resolution to the Greek debt crisis, something we do not believe will be, if it comes through, without significant repercussions. The June Swiss Franc gained 2 ticks to close at $1.0906, and the British pound gained 40 points to 15825. The June yen fell against most currencies after the Bank of Japan announced an increase of the size of its asset purchase fund. The Canadian dollar closed unchanged at 10014 while the Australian dollar lost 39 points to 10576. We continue to favor the dollar on the basis of improved economic data which would preclude further Fed easing and make the dollar more attractive for foreign investment.
Next page: Energies and ags
Energies: March crude il closed at $103.24 per barrel, up 93c and its highest closing level for the nearby contract since May of last year. Expectation that Greece would get another bailout and the strength in the Euro against the dollar prompted buying. For the week Nymex crude gained 4.6%. We view the buying as "irrational exuberance", an historic phrase of the past. Any change in the Greek bailout prospects or the potential for other eurozone country problems could prompt selling of Euros and strength for the dollar. For now the Iranian halt to oil shipments to Great Britain and France could prompt further price gains for crude oil. Stand aside.
Copper: May copper closed at $3.72 per pound, down 7c even as the dollar weakened this week. Disappoint inflation data from China could prompt reduced imports of the metal and a 15.3% decline in imports last month also a psychological factor in the selling. We continue to feel global economies remain weak and that could preclude demand for construction materials such as copper. Improved housing data was responsible for the strength in copper during the week. Hold put positions but do not add for now.
Precious Metals: April gold closed at $1,725.90 per ounce, down $2.50 as the improved U.S. economic data prompted the move of funds to equities from the usual safe haven of precious metals and treasuries. Expectation of increased inflation could prompt attraction to precious metals as a hedge. We continue to favor the sidelines for now. March silver closed at $33.216 per ounce, down 15.4c losing 1.2% for the week but for the year up 19%. We continue to prefer silver to gold on any new interest in precious metals. For now we would stand aside. The Eurozone debt crisis could prompt renewed interest in precious metals depending on the almost daily influx of news. April platinum closed at $1,633.90 per ounce on Friday, up $7.80 or 0.5% while March palladium lost $8.50 or 1.2% to close at $688.10 per ounce. For the year palladium has gained 4.9%. We continue to favor palladium over platinum if only due to the price disparity.
Grains and Oilseeds: May corn closed at $6.45 ¼ per bushel, up 5 1/2c tied to dry conditions in some growing areas of Northern U.S. and Canada. Less than average rainfall since August in Iowa and dry conditions in the upper Midwest in front of spring plantings is causing concern and some long hedges. We like corn from here but would scale into position. May wheat closed at $6.47 ¾ per bushel, up 12 1/2c and as with corn, the weather is increasingly problematic. We continue to favor the long side of wheat. May soybeans closed at $12.73 ¾ per bushel, up 8 3/4c tied to a recent huge order from China. We continue to favor the long side of soybeans as well. Key elements to watch are the weather and the U.S. dollar.
Meats: April cattle closed at $1.3090 per pound, up 1.25c tied to a scarcity of supplies. We continue to favor the long side of cattle but would bring up the trailing stops since we are in new high ground for prices. April hogs closed at 90.37c per pound, up 0.15c mostly tied to position squaring in front of the three day holiday weekend. We favor the sidelines for hogs.
Coffee, Sugar and Cocoa: May coffee closed at $2.0235 per pound, up 1.15c mostly on technically oversold considerations after coffee fell from nearly $3.00 per pound since last September. Expectations for Brazilian output to rise to a record this year is expected to continue to pressure prices. We like the sidelines. May cocoa closed at $2,345 per tonne, down $60 tied to continued origin selling and the recent shortcovering that moved prices higher has dissipated. We favor the sidelines after having been bullish as prices seemed to want to re-visit the $2,500 per tonne level. May sugar closed at 23.77c per pound, up 4 little points and remains in a tight range. Brazil is expected to convert more cane into ethanol but not enough to create supply concerns. We consider sugar a trading affair with the recent range
Cotton: July cotton closed at 93.65c per pound, down 1.21 and remains stuck in a range for February between 98c and current prices. Improved export sales could prompt new buying early in the week. We like cotton from here for a move back to $1.00 but use stops. We are close to recent support levels and any breach could prompt long liquidation and new shorts.
John L. Caiazzo