China’s influence was readily apparent this past week as signs of their economic slowdown weighed heavily on markets. Everything from food to industrial materials was impacted negatively. The People’s Bank of China announced it had reduced reserve requirements again for the third time in six months to support lending after data showed the slowdown in economic growth is deepening.
Chinese expansion had provided the impetus for global economic growth in the past and without the Chinese, global economies are expected to suffer. We suggest getting your financial house in order and reviewing investments to determine strategies for weathering the financial storm we see developing. Now for some actual information…
Interest Rates: June Treasury bonds closed at 145 and 4/32nds, up 25/32nds as once again funds shifted from equities to the relative safety of the U.S. treasury market. The usual move of money from one sector, equities, to the relative safe sector, U.S. treasuries, became more of a "stampede" this week rather than a "move". The news of the J.P. Morgan 2.5 billion dollar trading loss accentuated the overall equity weakness as rumors of the loss permeated the market place all week. Other factors for the "rush to safety" was the reports of a Chinese economic slowdown. China has been, moreso than the U.S., the "consumer of the world" and any concerns that the ‘buying frenzy" has subsided prompted immediate ramifications for global industry. We could see further gains in treasury prices pushing yields still lower so rolling over of short calls and puts (strangle positions) remains a possibility. We will advise clients as to which strike prices are appropriate. Treat treasury bonds outright as a trading affair.
Stock Indices: The Dow Jones industrials closed at 12,820.60, down 34.44 on Friday but for the week lost 1.6%. the S&P 500 closed at 1,353.39, down 4.60 and for the week lost 1.15%. The tech heavy Nasdaq closed at 2,933.82, up 0.18 and for the week lost 0.76%. The reports of Chinese "intervention" in the banking system along with the rumors and finally the report that J.P. Morgan Chase lost 2.5 Billion trading with possible additional loss as they unwind those responsible positions increasing that preliminary loss weighed on the financial sector and carried across the board to other sectors. We once again strongly urge investors with large equity portfolios to avail themselves of our expertise in developing hedging strategies unique to their situation.
Currencies: The June U.S. dollar index closed at 8043.5, up 17.8 against all European currencies with the Euro, (27 nations mostly in Europe) losing 29 points to close at $1.2924, the Swiss Franc, 25 points to $1.0761, the British Pound 84 points to $1.6067, and the Australian dollar 70 points to .9990. The June Japanese yen gained 5 ticks to close at 12523 and the June Canadian dollar gained 11 points to .9990. The Greece situation that has now been joined by problems expanding for Ireland, Italy, Spain, Portugal and most recently France with deepening debt could prompt one or more countries to leave the Euro. We have been suggesting that Greece would be forced out of the Euro and the austerity programs "promised" in order to secure bailout funds are in question. The recent report that Great Britain has fallen into recession is an indication of additional problems developing. Once again we suggest staying long the dollar even though the U.S. economic situation is not much better but at least "localized" and somewhat controllable.
Energies: June crude oil closed in late trading at $95.57 per barrel, down $1.51 and closing in on our projected price level of $80-85 per barrel. The news of J.P. Morgan’s huge trading loss along with Chinese growth slowing, led to concern of reduced demand for energy products. The dollar strength, in which crude is denominated as well as other commodities, was also a factor in the selling. We continue to expect further "damage" to chart structure and would hold put positions.
Copper: July copper closed at $3.62 per pound, down 6 points and their lowest level in two weeks. Concern over slowing growth in China along with Europe’s debt problems pressuring prices of copper and other industrial metals. One bright spot was the higher than expected passenger car sales in April by a Chinese auto maker trade group up 12.5% on the year. Expectations of increased vehicle sales of approximately 8% for 2012 was also supportive for prices. We continue to expect global economies to offset any good news for copper and prompt still lower prices going forward. Hold put positions but bear in mind support exists at $3.50 so you may wish to take profits before then.
Precious Metals: June gold closed at $1,579.90 per ounce on Friday, down another $15.60 against the strong dollar and reduced demand for precious metals. Gold demand has dwindled of late as a "saturation" point of sorts has been reached through the aggressive sales practices in the media has prompted huge buying by the public fearing inflation and listening to the "pundits" claiming they must own gold. We take no view on how much percentage of portfolio an individual should own, but we suggest a minor position only. We like "cash" in the mattress as opposed to some investments at this time. July silver closed at $28.885 per ounce, down 29.3c following gold. If ‘forced" to make a buying decision, it would be silver over gold based on past performance percentage wise. July platinum closed at $1,485.30 ,down $28.50 per ounce, with June palladium losing $12.20 per ounce to $603.15. Aside from our long palladium, short platinum spread and preference of silver over gold, we prefer the sidelines in the group.
Next page: Ags and softs
Grains and Oilseeds: The latest U.S. Department of Agriculture report prompted heavy long liquidation in soybeans, corn and wheat with July corn losing 6 1/2c to close at $5.81 per bushel, July wheat losing 4 1/4c to $5.97 per bushel and July soybeans losing 49 1/4c per bushel to close at $14.06. The U.S.D.A’s Thursday forecast is the first of the beginning of the growing season and could be affected by the outcome and certainly the weather. The affect on soybeans which had been our favorite in the group was to trade right through sell stops early in the week and prompted our move to the sidelines until the "smoke clears". However if the U.S.D.A is correct forecasting higher yields more than offsetting lower harvested acres, additional long liquidation could be in the offing. Soybean supplies are projected up 4% from 2011-2012. For now stay on the sidelines.
Meats: June cattle closed at $1.1515 per pound, down 70 points on continued long liquidation. Additions to feed lots and farmer intentions to increase herds weighing on prices. We could see further price moves to the $1.10 area but our expectation that herds will take longer to increase supplies, could support prices from here. Stay with call positions but do not suggest adding for now. Cattle have recovered since trading down to $1.11 area late April. July hogs closed at 85.15c per pound, up 3.75c on shortcovering after trading down to 83.75c during the week. We continue to favor the sidelines in hogs even as "barbecue" season is at hand.
Coffee, Cocoa and Sugar: July coffee closed at $1.7675 per pound, down 1.9c as prices remain in a tight range. The Brazilian 2012-2013 harvest is now starting and according to one source could reach 55.3 million 60- kilo bags, an increase over previous estimates. We like coffee but would only consider call purchases, not outrights. July cocoa closed at $2,308 per tonne, down $30 but for the week managed a 1.3% gain. Expectation of Ivory Coast farmers for a drop in output this year due to a lack of maintenance on plantations along with poor weather prompting new buying. Improved quality reported as the mid-crop harvest progresses could prompt some selling pressure. Stay long through call purchases. July sugar closed at 20.20c per pund down 25 points tied to large supplies and the dollar strength. Stay out for now.
Cotton: July cotton closed at 78.97c per pound, down 2.85c after touching the exchange limit down. U.S. farm officials forecast prices potentially falling to 65c per pound caused by the biggest inventories in history. However, expectations that world cotton output may decline by 7.7million bales in 2012-13 and lower harvest could challenge that forecast. China, the world’s biggest harvest, according to the U.S.D.A could drop substantially and provide support at current prices. The selloff from last years $2.27c per pound was overdone in our opinion, and result of the "rubber band" type reaction to those high prices. With expectation of increased world consumption by 3.3% we could see renewed interest by commodity funds. We continue to favor the long side of cotton.