The head of the European Central Bank, Mario Draghi, speaking at an investor conference in London said that he was prepared to do "whatever it takes to preserve the euro." I believe that statement represents an exercise in futility. The markets however, took this to the bank and rallied on Thursday and Friday. The euphoria wont last. The reality is the European debt crisis is far from over and the decline in E.U. economies as well as that of the U.S. remains recessionary.
The U.S. Gross Domestic Product, the value of all goods and services produced in the U.S., rose at only 1.5% in the second quarter of 2012. In the first quarter of the year, the GDP was 2.0% after 4.1% in the last quarter of 2011. Expectation that the U.S. Federal Reserve would necessarily consider a third stimulus to reverse the downtrend also prompted the investor euphoria. We remain skeptical of any resolution of the European debt crisis because we don't believe that there is enough money to resolve the problems of imminent default by some of the Euro member countries. Now for some actual information…
Interest Rates: The September U.S. Treasury bonds closed at 150 and 1/32nds, down 2 and 15/32nds as money made the "trip" back from the relative safety of treasuries to the equity markets. The speech by ECB chief Mario Draghi, that he would do "whatever it takes to preserve the Euro" sparked optimism that we believe is unfounded but markets will "see" what they want to see and global equity markets and the Euro rallied sharply. We continue to feel the U.S. treasury bond is in a range and "guided" by economic news. The decline in prices was prompted by the possibility that the negative U.S. economic data could prompt the U.S. Federal Reserve to provide another round of stimulus efforts. We do not believe however, that any stimulus will offset the ongoing U.S. recessionary trend. We have stated in recent commentaries that if the U.S. Administration does not recognize that lower tax rates offshore will keep manufacturers from returning the jobs to the U.S. and the concept of a "jobless recovery" is a "figment of their imagination". We could see further wide price swings but the selling on Thursday and Friday may be overdone.
Stock Indices: The Dow Jones industrials closed at 13,075.66, up 187.73, and gained triple digits for two successive sessions. The statement by the ECB head increased hopes that further stimulus would be provided to improve global economies. The negative U.S. economic data also help as expectation that the U.S. Federal Reserve would also move to "stimulate" the U.S. economy added to the positive investor "euphoria". We are skeptical that the Euro debt crisis can be abated or that any action by the U.S. Fed will pre-empt Friday’s jobs data. For the week the Dow, while weak coming into Thursday able to reverse and post a 1.97% weekly gain. The S&P 500 closed at 1385.97, up 25.95 and also posted a weekly gain of 1.71%. The Nasdaq closed at 2958.09, up 64.84 points for its weekly gain of 1.12%. We believe the markets "hung their hats" on the ECB statement, the possibility of U.S. Federal reserve stimulative action and that reality will set in and markets will react negatively. We suggest that the market action of the last two days of the week has provided the opportunity to implement strategic hedging programs.
Currencies: The September U.S. dollar index managed a late day correction after heavy selling tied to the ECB statement which prompted buying of the Euro and other European currencies. The dollar closed at 8267 down 18.9 points after trading as low as 8240 during the session. The Euro conversely traded as high as $1.2397 before settling back to $1.2317, up 24 ticks. The "celebration" was tied to ECB Chief Draghi stating that he would do "whatever is necessary to support the Euro". Support by German Chancellor Merkel and French President Hollande confirming Draghi’s statement that they are "determined to do everything possible to protect the euro zone" was also a factor in the Euro rally. The dollar was also impacted by the possibility of Fed further stimulus to support the U.S. economy. None of the "support intentions" in our opinion is relative to the ongoing global economic decline and we continue to favor the dollar. While the U.S. economy is weakening, relative to the European problems remains the viable alternative. Stay with the dollar.
Energies: September crude oil closed at $95.20 per barrel up 87c against the weak dollar even though demand in a declining economic environment could continue to pressure prices. While optimism persists after the ECB, German, and French statement confirming support for the Euro, we see no such reversal of the current global recessionary trend and expect energy prices to decline further. Geopolitical concerns related to Iran and Israel, however, could alter our current expectation of continued price pressure.
Copper: September copper closed at $3.43 per pound, up 4c on Friday tied to expectations the U.S. and European governments will "expand" stimulus programs. The weak dollar also a factor in the shortcovering and new buying. We do not expect further price gains in copper since China, as the major user of copper, is undergoing industrial contraction. We remain bearish towards copper.
Precious Metals: October gold closed at $1,624.50, up $7.10 or 0.44% against the weak dollar and the prospect of further efforts to support faltering European economies. September silver closed at $27.70 per ounce, up 25.4c following the dollar but as has been the case the past few years, outperformed the dollar percentage wise gaining .93% on Friday. October platinum closed at $1,411.50, up $5.90 while September palladium gained $7.60 per ounce to close at $577.50. We have preferred the spread transaction long palladium, short platinum for some time and remains our favorite in the group. With a global recessionary trend and no real inflation, we favor the sidelines in gold. For those that must have a precious metal in their portfolio, we like silver over gold.
Next page: Ags and softs
Grains and Oilseeds: September corn closed at $7.98 ½ per bushel up 17 1/4c even with no fresh news to report. The ongoing drought has disappointed crop forecasters and while prices may have over extended the past weeks the recent correction may have provided a new buying opportunity. Even some moisture may not be able to save a large portion of the crop so prices could remain high and advance further. September wheat closed at $8.98 per bushel, down from the session high of $9.11 on pre weekend profittaking. As I have been indicating in prior commentaries, do not be short anything that grows. Russian wheat production estimates continue to decline and with the U.S. grain belt drought, global crop concerns remain. November soybeans closed at $16.01 ¾ per bushel, up another 34 1/4c and remains our favorite in the group. We had been recommending soybeans from the $8.00 level but last week suggested taking profits "off the table". A correction was in order and profittaking took prices down from nearly $17 per bushel but the damage to crops remains a consistent factor. We await Mondays crop report before taking any further action.
Meats: August cattle closed at $1.1980 per pound, up 1.425c on reduced U.S. beef supplies but remains rangebound between $115 and $1.21. The market has been effected by high feed prices as farmers pushed cattle to market increasing supply. However, the restoration of herd sizes takes time and that could prompt shortages in the future. We like the sidelines for now. August hogs closed at 95.2c per pound down 60 points on profittaking after recent gains tied to better cash values. We continue to favor the sidelines in hogs however.
Coffee, Cocoa and Sugar: September coffee closed at $1.7410 per pound, up 5 ticks on Friday tied mostly to the dollar weakness. Profittaking from the recent high around $1.90 level along with pressure from improved weather in Brazil even though rains had disrupted harvesting recently. We prefer the sidelines at current levels. September cocoa closed at $2332.00 per tonne, up $16 tied to the weak dollar but moreso on declining supplies from the worlds largest cocoa producer, Ivory Coast. We could see further price gains to the $2,500 level. We like cocoa from here but use stop protection. October sugar closed at 22.52c per pound, up 2 little points on shortcovering after prices sold off sharply on Thursday from the 24c level. Prices failed to break through the 24c resistance level and traders decided to take profits. We could see another attempt to run through the 24c level but use stops on any buying.
Cotton: December cotton closed at 71.45c per pound, up 6 points but remain mired in a tight range around current levels. Some concern tied to India exports keeping prices at these levels. The global economic situation also a factor in the lacklustre performance for cotton. Stay out for now.