The global economic uncertainty played a role this past week, as it has for months now. Concern over individual Euro countries, weakening data from China, and a potential return to global recession re-emerged as primary concerns.
The United States as the consumer of the world and second place China are both experiencing economic stagnation and remission (a better term than recession). The recessionary trend we have been warning against is manifesting itself in weakening global demand for energy products, manufactured goods and industrial commodities. The downtick in Thursday's U.S. first-time unemployment data, as I suggested would occur when fewer workers were available for layoff, occurred and does not foretell of an improving labor situation.
On Friday, the Thomson, Reuters-Jeffries CRB index was down a full percent, indicating a broad decline in the 19 commodity markets within its index. We continue to believe a global recessionary trend will cause a financial and economic deterioration and strongly suggest a review of all investments to ensure a preservation of capital during troubled times.
With a U.S. election forthcoming, we expect the current government to try to "put lipstick on the economic pig" but in our opinion, efforts will fail to provide a return to economic prosperity. With the ongoing labor situation, credit market defaults, and home mortgage and foreclosures, we see no hope and change in the immediate future.
Now for some actual information...
Interest Rates: September treasury bonds closed at 148 and 27/32nds, up 19/32nds on pre-weekend shortcovering Friday after the sharp losses during the week that saw prices decline from the 153 level to 147. Money made the move from the relative safety of treasuries back to equity markets on expectation that the Euro debt crisis could be resolved and the ECB posture of willingness to provide whatever support was needed to ensure Euro survival and stability. Our expectation of a price range of 145 to 155 remains intact and the current low end of that range could provide for a meaningful rally in bonds.
Stock Indices: The Dow Jones industrials closed at 13,207.95, up 42.76 on a rally from an earlier low of 13,094.96. For the week the Dow managed a gain of 0.85%. The S&P 500 closed at 1405.87, up 3.07 and for the week gained 1%. The Nasdaq performed better on the week posting a 1.78% gain closing Friday at 3,020.86, up 2.22 on the day. Expectation that the U.S. Federal Reserve might provide additional economic stimulus and continued rhetoric from Europe on determination to support the Euro and avoid individual country defaults played a role in the positive reaction in the markets. We, however, remain concerned that certain Euro members will in fact default on their obligations, and the possibility of a Euro "contraction" remains. We once again warn investors that there is no solution to the Euro debt crisis that we can see and that there is not enough money in the coffers of the ECB to prevent defaults in some cases. We continue to look for sharp declines in global markets and suggest the implementation of hedging strategies.
Currencies: The September U.S. dollar index closed at 8263.5, down 7.5 points on continued weakness from the 8400 level as the ECB President Mario Draghi continued to reinforce the strategy of supporting the Euro by planning to buy the debt of troubled countries to avoid defaults. We see this "strategy’ as faulty given the reduced "income" of the stronger European economies due to the ongoing recessionary trend and find his "words" to hold empty promises. The September Euro closed on Friday at $1.2297 after trading as high as $1.2759 during the week. The September Swiss Franc closed at $1.0245, up 1 tick, the Japanese yen .12785, up 55 points, the British Pound up 38 points to 15871, the Canadian dollar $1.0073, down 1 and the Australian dollar $1.0532, down 10. We prefer the dollar even though we feel a U.S. recessionary trend continues but relative to Europe and China, the dollar is our best "bet". Stay with the dollar and add to long dollar positions either through futures or call options.
Energies: September crude oil closed at $93.39 per barrel, down 3c after trading at a 12 week high on Tuesday of 9472 but managed a 1.6% gain for the week. The International Energy Agency lowered its 2013 global oil demand forecast by 0.2 million barrels a day and China’s July crude imports slipped to its lowest level since December. With our expectation of a continuing global recessionary trend we expect demand to decline and prices to follow. We like put options on crude.
Copper: September copper closed at $3.40 per pound down 1 cent after trading between $3.42 and $3.36 during the session. China’s export of goods rose by only 1% in July from the prior year and was below expectations. With global industrial expectations in decline we expect copper prices to decline further reflecting reduced demand from the U.S. and China. Buy puts.
Precious Metals: December gold closed at $1,622.80 per ounce, up $2.60 in quiet trading on Friday. Hopes for added economic stimulus by the U.S. Federal Reserve and statements by the ECB President Mario Draghi in support of the Euro community seemed to offset the general malaise associated with inflation hedges such as gold. We prefer the sidelines. September silver lost 4c to close at $28.06 per ounce as prices remain rangebound. We continue to prefer silver over gold for those that must have precious metals in their portfolio as a hedge against currency degradation. October platinum closed at $1,399.90 per ounce, down $12.90 or 0.9% while septem ber palladium closed at $582.20 per ounce, down $4.50 or 0.8%. For the week palladium rose 0.7% against platinum’s loss of 1%. Our long palladium, short platinum spread remains in favor.
Next page: Ags and softs
Grains and Oilseeds: September corn closed at $8.00 per bushel, down 18 1/4c after trading as high as $8.43 ¾ on the USDA monthly supply/demand report showing a cut in its forecast for U.S. corn production. However prices fell on a disappointing USDA forecast for domestic corn inventories. We once again suggest the sidelines for clients not willing to assume the risk of wide price swings. September wheat lost 27 3/4c to close at $8.85 ¼ per bushel. Wheat followed corn up and then down as both are used for food and animal feed and are linked. Stay out of wheat also. Our favorite in the group however continues to be soybeans. November soybeans closed at $16.43 ¾ per bushel, up 12 1/2c on the USDA announced sale of 290,000 metric tons of soybeans to China during the 2012-2013 marketing year. A number of similar announcements during the week indicates continued strong demand for soybeans regardless of high prices. We continue to suggest the purchase of soy on any declines as we have for some months now. We don’t see an intermediate "top" for the time being although serious resistance between $18 and $20 can be expected. Take some profits "off the table" when available and then look to re-establish longs using stop protection of course.
Meats: December cattle closed at $1.2845 per pound, down 50 points with December hogs closing at 73.425c per pound, also losing a half penny. With poor grazing and high feed costs, animals are being pushed to market and while that portends short term supply gains, for the longer term, herd replacement will take time and eventually prompt supply cutbacks. For now the sidelines is the safe place to be unless you eat a lot of beef, and put out pork spareribs at barbecues…..
Coffee, Cocoa and Sugar: September coffee closed at $1.6640 per pound, down 5 ticks. ICE certified arabica coffee stocks were up 12,301 lots to 1,820,401 on August 9th, the highest since September of 2010 and over 65,000 lots are awaiting grading. Selling pressure should remain and we prefer the sidelines. September cocoa closed at $2,438 per tonne, down $25 on profittaking but still managed a 2% gain for the week. An El Nino weather pattern is under way and could cause widespread drought in Africa and Australia. Shortcovering and new buying on those concerns pushed prices up from the $2,200 per tonne area to nearly $2,500 per tonne, a figure we had been looking at for some time. We like cocoa but at current prices would await profittaking setbacks before buying. October sugar closed at 20.88c per pound, up 8 ticks even though the USDA lowered its forecast for domestic sugar supplies in the 2012-13 marketing year. Brazil, a major grower forecast improved transportation progress as well as better growing weather in India, the Number 2 producer. We prefer the sidelines in sugar.
Cotton: October cotton closed at 72.90c per pound, down 2.69c after hitting 75.52 during the session. Without new fundamentals and in line with other weak demand from China for commodities, we prefer the sidelines.