Markets have historically reacted to geopolitical as well as economic news. This past week has provided investors and traders with both.
After a Hamas leader was killed, Hamas decided to lob rockets into Israel regardless of the obvious ramifications to their people in Gaza. An attack on Israel always results in severe repercussions and retaliation. The irresponsibility of the Arab countries in supporting Hamas is indicative of their disdain for Israel. The escalation of hostilities is expected and could prompt concerns by the West of energy disruptions. We can only hope that clearer minds will materialize in that part of the world.
The beginning of negotiations for a budget between the two main players, President Obama and John Boehner, the majority leader of the House of Representatives, began in earnest on Friday. The apparent pleasantries and the media assessment are that a deal is in the making before the Dec. 31 deadline. The risk to the U.S. economy of the expiration of the Bush tax cuts would be immeasurable and unacceptable. If the only reason for the delay is the assumption by President Obama that Americans earning $250,000 represent the "millionaires and billionaires" of the country, then an adjustment to $500,000 or even $1 million makes more sense and could be the determining factor in an agreement. The political dancing is playing havoc with the markets, and some concession on both sides is necessary.
Now for some actual information...
Interest Rates: December Treasury bonds closed at 152 7/32nds, up 6/32nds as a meeting between Senate and House leaders meet with President Obama. Concern that a failure to extend the Bush tax cuts could push the U.S. economy over a "fiscal cliff" and traders moved money to the relative safety of the U.S. treasury market. The yield on the 30 year bond declined 1 basis point to 2.72%, the lowest since early September. We continue to suggest bonds are in a trading range between 145 and 155 and could approach the higher end of the range depending on further delays in agreeing to spending cuts and the tax cut extension. The Thursday sharp increase in first time unemployment to 439,000 from 360,000 was possibly a result of the storm activity in the Northeast where unemployment offices were closed. We could see a resumption to the "norm" this week but the fact is simply that a first time unemployment application is the result of a job lost…..The disparity between the "euphoria" of a 125,000 monthly job gains on the first Friday of each month and the job loss weekly is never mentioned or reconciled in the media or by the U.S. administration.
Stock Indices: The Dow Jones industrials closed Friday at 12,588.31, up 45.93 on pre weekend shortcovering after the sharp selloff leaving the Dow down 1.8% for the week. The S&P 500 closed at 1,359.88, up 6.55 points but for the week lost 1.5%. The tech heavy Nasdaq closed at 2,853.13, up 16.19 points but still lost 1.8% for the week. The buying on Friday was a result of House Speaker Boehner indicating the opening budget discussions at the White House were "constructive". We fully expect an agreement will be formulated before December 31st but expect some "dramatics" before the final solution is achieved to extend the Bush Tax cuts. Our expectation is for a compromise between the $250,000 "millionaire and billionaire" of the President and the spending cuts wanted by the House of Representatives. Since we expect a resolution we could get a sharp rally in equities and a decline in treasuries but that would be shortlived since the reality of a weakening U.S. economy and corporate earnings disappointments will prompt a resumption of the "bear market" in equities in our opinion.
Currencies: The U.S. dollar index, which measures the dollar against a basket of currencies, closed at 81.31 on Friday up 33.5 points on concerns that the U.S. Administration may not be able to avoid the so-called "fiscal cliff". Money moved to the relative safety of the dollar and moreso the U.S. Treasury Market. The recent hostilities between Israel and the Palestinians following the killing of an Hamas leader in Gaza and the rockets launched against Israel could accelerate and prompt further demand for safety. We have been bullish on the dollar for some time and see no reason to adjust our posture.
Energies: December crude oil expired on Friday as it gained $1.22 to close out at $86.67 per barrel. Concern that the hostilities between Israel and Hamas will escalate could affect Middle East crude oil shipments prompted shortcovering and new buying in crude. Our previous estimate of $75-80 per barrel is negated by these actions so we are now on the sidelines having nearly achieved our goal.
Copper: December copper closed at $3.4615 per pound, down 1.10c tied to a surprise decline in U.S. industrial production and the inability to definitively avoid the so-called "fiscal cliff" of spending cuts and tax increases as yet. We expect an agreement before December 31st and that could prompt an initial rally albeit shortlived in our opinion. The U.S. and International economies appear more likely headed to recession and on that basis copper demand and consequently price decline should occur. Hold put positions and on the anticipated rally prompted by an agreement, add to March put positions.
Precious Metals: December gold closed at $1,714.70 per ounce, up 90c on Friday but for the week posted a 0.9% loss. On Thursday gold had lost $16.30 per ounce as a World Gold Council report indicated that demand for the precious metal had weakened in the third quarter. Our positive attitude toward the U.S. dollar could further affect the price of precious metals. December silver closed at $32.37 per ounce down 0.9% and for the week lost 0.7%. January platinum closed at $1,561.80 per ounce, down 0.7% while December palladium lost 0.8% to close at $626.45 per ounce. We remain sidelined on precious metals.
Next page: Grains and softs report
Grains and Oilseeds: December corn closed at $7.27 per bushel, up 4 3/4c on Friday but for the week lost 1/5%. Some cancellations by China impacted the grains and soybeans this week and we prefer the sidelines in corn. December wheat closed at $8.38 per bushel, down 8 3/4c continuing it’s downward slide and the longest since September of 2011. Stay out for now. March soybeans closed at $13.68 per bushel, down 16c and to its lowest price in almost five months on Chinese purchase cancellations and improved planting progress in South America. We are on the sidelines here as well. Any change in fundamentals could put us back in the "bull" camp.
Meats: December cattle closed at $1.2615 per pound, up 55 points on shortcovering against the dollar and on declining supplies. We like cattle from here after trading as low as $1.2395 recently. We may have seen an interim bottom. Use stop protection. December hogs closed at 80.325 per pound up 25 points on speculation that U.S. pork supplies are declining. Hogs have had a nice run from its September low around 70c and we could see additional buying on both speculative and technical considerations
Coffee, Cocoa and Sugar: December coffee closed at $1.4710 per pound, unchanged and remains near its recent bottom after declining steadily from the $1.8545 recent high. We prefer not to "stand in the way of a locomotive" and even though some correction can be expected, the continued long liquidation in the face of reduced European demand and reports that Europe is in recession. March cocoa closed at $2,398 per tonne down ¾%, it’s biggest decline for the most active contract since October 24th. This week cocoa managed a 1.7% gain. The selling was in response to reports that supply concerns in Ivory Coast, the world’s largest producer, had eased somewhat. We would look to buy on any dip but using stop protection. March sugar closed at 19.15c per pound, up 7 points on light shortcovering after recent long liquidation tied the International Sugar Organization report that Brazil’s sugar industry could increase output to a record high next season. Its first forecasts for the 2013-2014 season could halt any upward price progress. The selling may be overdone for now so hold any recently purchased calls.
Cotton: December cotton closed at 72.73c per pound, down 1.23c but recent indications of plantings moving from cotton acreage to soybeans could prompt additional shortcovering and new buying from its recent 69.03c lows. We like cotton but as with other markets due to the unknowns related to the U.S. tax extension situation which if not resolved by December 31st could cause havoc in the financial markets and spillover to commodities.