Overview and Observation; Economic and interest rate concerns permeate the marketplace as various comments by Fed Governors move market back and forth. The “Bernanke two-step” started the markets on a “collision course” as his statement two weeks ago led investors and traders to believe an end to QE was “imminent.” Then last week he “corrected” his comments by stating that the QE would continue until the unemployment rate declined to 6.5%, it currently stands at 7.6%. In the meantime various other Fed presidents gave conflicting “opinions” on whether or not QE would continue “indefinitely” or come to an end later this year. That level of “contradictory” comment gave rise to wide price swings in the various indexes we follow as well as any interest rate related markets. Most markets are tied to the dollar, which in turn is based on expectations or comments on interest rates going forward. For that reason our comments and opinions are tempered. Without a definitive expectation for the basis, i.e., U.S. interest rates and their relativity to global rates, markets will continue to be “directed” by other than “supply/demand” factors. Now for some actual information to hopefully “guide” our readers and clients in the “future”…
Interest Rates: September Treasury bonds (CBOT:ZBU13) closed Friday at 134 12/32nds, down 28/32nds tied to comments by Federal Reserve Bank of Philadelphia President Plosser who said the central bank should “begin tapering bond purchase in September.” That statement helped the dollar and U.S. equities. Funds “make the trip” between the safety of U.S. Treasuries to risk assets such as equities depending on the “news of the day” or comments by Fed Presidents whether or not they are voting members. We told clients to take profits early in the day prior to those comments. We prefer the sidelines for now but with a bullish bias tied to expectations of a U.S. economic “deterioration” and the resulting equity market decline.
Stock Indexes: The Dow Jones Industrial Average closed at 15,464.30, up 3.38 in a choppy session as comments by various Fed members influenced traders. For the week the Dow gained 2.16%. The S&P 500 closed at 1,680.19, up 5.17 and for the week managed a gain of 2.96%. The tech heavy Nasdaq closed Friday at 3,600.08, up 21.78 points and for the week gained 3.47%. Market participants “celebrated” the decision by the Fed to keep Quantitative Easing in effect through 2014 as stated by the “last comments” of Fed Chairman Bernanke. Earnings “season” is in full swing and we expect the markets to be influenced almost on a daily basis for now. Our concern that there remains a “black hole” under the equity market and fully expect a major correction similar to that of 2008. We once again implore holders of large equity positions to implement strategic hedging programs, something we have developed over the years
Currencies: The September U.S. Dollar Index (NYBOT:DXU13) closed Friday at 82.93, up 23 points but for the week lost 1.7% tied to a speech by Fed Chairman Bernanke on Wednesday. The September Euro (CME:ECU13) closed at $1.3096, down 37 points after Fitch downgraded France’s credit rating. Other currencies also weakened on Friday and we continue to suggest that while our view of the U.S. economy is negative, relative to those of its trading partners is worse. The Fitch downgrade of France’s debt is only the beginning or actually a continuation of the debt crisis in the Eurozone. We expect further declines in currencies with the corresponding dollar strength. Add to long U.S. dollar positions either with futures or call options.
Energies: September crude oil (NYMEX:CLU13) closed at $1.0555, up $1.36 or 1.29% tied to continuing concerns over geopolitical events such as Syria and more importantly Egypt, which controls the Suez Canal through which much of the world’s crude oil is shipped. We remain on the sidelines but with a bearish bias tied to our estimates of adequate near term supplies.
Copper: September copper closed at $3.1550 per pound, 1.95c or 0.7% after recent shortcovering from its lows. Some long liquidation came after indications that the economy of China, the world’s largest consumer of industrial metals, might expand less than earlier government forecasts. The Chinese Finance Minister stated on Thursday, that expansion would be 7% in 2013 after original government goals of 7.5% were announced. The weakness in GDP would be the ninth such in 10 quarters according to analysts. We retain our bearishness towards copper once again based on our expectation of global economic deterioration. Inventories at the London Metals Exchange declined by 2.9% which was the largest reduction since October of 2012. Hold put positions.
Precious Metals: August gold closed at $1,277.60, down $2.30 on Friday after four straight session gains but for the week still managed to gain 5.4%. The weekly gain was the best since October of 2011. We remain bearish for gold since the usual impetus for gold, inflation, remains tame internationally. Our global assessment is for continued economic deterioration and ongoing debt crisis. One of the major buyers in the past has been the Far East and that seems to have diminished. India remains a strong buyers but not enough to offset the negativity associated with global economic concerns. September silver closed at $19.79 per ounce, down 16c on profittaking after the 4.1% gain on Thursday. For the week, as with gold, silver posted a 5.6% gain. We remain on the sidelines but once again, for those that “must have” precious metals in their portfolio, we prefer silver on a percentage gain basis against gold. October platinum closed at $1,406.90 per ounce, down 70c while September palladium gained $4.70 per ounce to close at $722.90. Both white metals posted over 6% gain for the week tied to the recent strike by South African mine workers. We prefer the sidelines but once again as stated in prior commentaries, our choice is palladium over platinum.
Grains and Oilseeds: September corn closed at $5.45 ½, down 15 1/4c, its biggest monthly drop since March on adequate global supplies and farmers are reported a record crop in 2013. Stockpiles in the U.S. should more than double by the beginning of the 2014 harvest according to the USDA. We prefer the sidelines. September wheat closed at $6.81 per bushel, down 1 14c also tied to the USDA report. November soybeans closed at $12.57 ¼ per bushel, down 33 3/4c also tied to the USDA report indicating a strong recovery in production and lower prices. We prefer the sidelines after having been bullish for beans.Previous concerns over possible weather damage did not materialize. The monthly USDA report on Thursday forecast large fall crops for beans and corn. Stay out for now.
Meats: August cattle closed at $1.2170 per pound, down 0.22c while August hogs lost 0.57c to 94.70 cents per pound. The decline in U.S. exports the main factor in the weakness. Recent price gains in cattle after the June lows could continue but we prefer the sidelines. Hogs remain centered in the recent range from May to June and could go either way. Stay out for now.
Coffee, Cocoa and Sugar: September coffee closed at $1.194 per pound, down 4c on indications that the Brazilian harvest will avoid any frost damage and will produce the third largest harvest ever. We continue to prefer the sidelines. September cocoa closed at $2,232 per tonne, down 0.3% but only after trading at $2.260, the highest level for the front month since mid June. Traders are awaiting the U.S. and European cocoa grinds which would give an indication of demand. We prefer the sidelines. October sugar closed at 16.06c per pound down 0.2% tied to ongoing weakness in the Brazilian real. The weak currency prompts growers to sell in order to maintain the level of reals for their product. Stay out for now.
Cotton: December cotton closed at 85.08c per pound, up 34 points tied to lower USDA reported cotton stocks. Increased estimates for ending stocks could continue to pressure prices going forward. We prefer the sidelines.