Global markets responded in concert at the news this past week. The U.S. jobs created data perpetuated the assumption of a labor condition recovery. The reality is that any reduction in first-time unemployment applications reflects a reduced number of employees available for layoffs. The unemployed and underemployed numbers are too high to substantiate an economic recovery. As I have been stating for some time, "an unemployed consumer does not consume." The report of increased inventories is witness to that, and I expect the reality of a sustained economic contraction will soon materialize and be reflected in the nternational marketplace. Now for some actual information to assist my readers in making appropriate trading decisions…
Interest Rates: "The tail does not wag the dog". Rhetoric from the investment community has "determined" that the bond market rally is over. The bond market is not the determining factor, the Federal Reserve is in its intentions as to whether or not they will relax their quantitative easing program and allow rates to move higher. That being the case, Treasury bond prices would decline. Unfortunately analysts suggesting declines in bond prices fail to recognize that the economic condition will determine the Fed’s actions as to rates and not the price of bonds. The June 30 year Treasury bond closed at 145 and 4/32nds, down 1 and 12/32nds as the "euphoria" with equities persists and money made the transition from the safety of treasuries to the equity markets. The expectation that given the recent economic data that the U.S. Fed may curtail further stimulative easing and that has prompted long liquidation of treasuries. We remain convinced that no such revision to Fed policy is in the offing and that treasuries will remain in a range as suggested in prior commentaries.
Stock Indices: The Dow Jones industrial average closed at 15,118.49, up 35.87 points and for the week gained 0.97%. The S&P 500 closed at 1,633.70, up 7.03 points and for the week gained 1.18%. The tech heavy Nasdaq closed at 3,436.58, up 27.41 points and for the week gained 1.72%. The positively construed U.S. labor data as well as an increase in consumer confidence prompted the transition from the relative safety instruments back to equities. We do not believe the rally in equities nor the positive sentiment can be sustained and once again suggest strongly the implementation of risk hedging strategies, something we have prepared for those with large equity holdings. Our programs attempt to mitigate any severe market contraction.
Currencies: The June U.S. dollar index closed at 83.235, up 36 points against its trading partners as the U.S. economic and labor data fomented a positive attitude towards the U.S. The most gain for the dollar came against the Japanese yen where a government report indicated Japanese investors increased holdings of overseas bonds. The Yen lost 2.7% to close at 101.62 for each dollar. Analyst expectations are for continued yen value decline. As far as the other losses Friday, the Euro lost 32 points to $1.2987, the Swiss Franc 93 points to $1.0448, the yen 100 points to 9844, the British Pound 70 points to $1.5356, the Canadian dollar 28 points to .9878c and Australian dollar 43 points to .9985c. We have favored the long side of the dollar for some time and continue to feel that relative to its trading partners, albeit our expectation for a U.S. economic contraction, the dollar is a better choice. We expect further deterioration of Eurozone economies along with continued erosion of the Yen. Stay with the dollar.
Energies: June crude oil closed at $95.84 per barrel, down 55c but posted a small weekly gain. During the session crude traded as low as $93.37 per barrel but shortcovering in front of the weekend took prices back at the close. OPEC, the Organization of Petroleum Exporting Countries, warned that challenges could alter its outlook for demand and that prompted the long liquidation in front of the weekend. The expectation for continued reduced demand tied to global economic uncertainty prompted the selling which we have been expecting for some time. The reality of a contracting global economic situation especially as relates to Europe, Japan, and to some extent the U.S. and China, could further prompt concern over optimistic pricing. We are bearish on crude but with an eye towards the escalation of Mideast tensions.
Copper: July copper closed at $3.3775 per pound, up 3.7c on shortcovering after recent long liquidation tied to economic news considerations. We have been bearish for some time tied to the recent demand reductions from China, one of the major user of industrial metals. The "positively construed" U.S. economic data provided the impetus for the shortcovering late in the week. We continue to feel demand for industrial metals will erode with our negative view of global economies. We remain bearish for copper.
Precious Metals: June gold closed at $1,442.20 per ounce, down another $26.40 posting a 1.8% loss on Friday and for the week lost nearly 2%. The U.S. jobs data of first time unemployment declined unexpectedly on Thursday reducing pressure on the U.S. Fed to continue aggressive monetary stimulus. We do not agree with assumptions that a one week reduction of first time unemployment applications will move the Fed to abandon it’s current policy prior to its previously "stated" expectation of low rates through 2014. During the session gold posted a $30 per ounce loss before recovering slightly at the close. We remain sidelined in precious metals. July silver lost 25c per ounce or 1.1% to close at $23.66 per ounce and for the week lost 1.5%. Some Japanese hedge funds holding large gold related positions are reviewing their positions with the weak yen providing transition from gold to Japanese equity markets according to a New Delhi bullion analyst and that provided additional pressure to gold. We are also on the sidelines in silver as well. However, for those that "must have" a precious metal in the portfolio, we prefer silver to gold since its overall percentage gains exceed those of gold. The Friday loss in gold was 1.8% against the silver loss of 0.7%. In either direction silver "outperforms" gold. July platinum closed at $1,489.80 per ounce, down $26.70 or 1.8% while June palladium lost $7.80 per ounce or 1.1% to close at $706.95. We prefer the sidelines in this group although any gains in international auto sales would provide demand for the white metals used in catalytic converters and other oil refining applications.
Next page: Ags and softs report
Grains and Oilseeds: July corn closed at $6.36 ½ per bushel, down 12 1/4c after trading as low as $6.25 during the session. Weather conditions improved allowing farmers to start aggressive plantings leading to expectation of a record corn crop. The USDA monthly crop report forecast a greater than expected domestic supply for the next year prompting long liquidation. We prefer the sidelines in corn. July wheat closed at $7.03 ½ per bushel, down 20c with the low of $7.02 posted during the session. The USDA crop report also impacted wheat prices. We prefer the sidelines here as well. July soybeans closed at $13.98 ½ per bushel, down 10 1/4c also tied to the USDA forecast for an increase of domestic stocks. We had been bullish for soybeans and are now on the sidelines as well.
Meats: June cattle closed at $1.2040 per pound, down 15 ticks. We have no comment this week. June hogs closed at 90.75c per pound, up 175 points and we also have no comment here as well. Even with the onset of summer barbecue season, the mixed fundamentals do not provide us with any directional suggestions.
Coffee, Cocoa and Sugar: July coffee closed at $1.4420 per pound, down 3.7c on profittaking after having gained over 3% to its two month high on Thursday. We liked the long side of coffee even against expectations of better than expected off year Brazilian crop estimate. Cold weather for Brazil is forecast and short covering was the main feature of late. Technically motivated fund buying also a factor in the recent strength. We would hold off any new purchases pending further information from Brazil. July cocoa closed at $2,305 per tonne, down $44 on speculation that the buying of late was overdone against expected adequate supplies to meet demand. We like the sidelines from here. July sugar closed at 17.39c per pound, down 8 ticks closing in a 2 ½ year low. Expectation for a record cane crop from Brazil and larger than expected output from both Thailand and India remains a factor in the selling pressure. We continue to prefer the sidelines in sugar.
Cotton: July cotton closed at .8669c per pound, down 1.23c on mixed trading midway between the late February low of .8270c and mid-march high of .9420c. The International Cotton Advisory Committee early in the month had raised price expectations even against their estimate for greater world inventories. We prefer the sidelines until further fundamentals emerge.