Overview and Observation
I am not sure who will "blink" first but whether it is President Obama or President Putin the markets weigh each rhetorical statement and take action in expectation of one or the other. If the President blinks then Crimea becomes Russian and perhaps everything gets back to "normal". If Putin blinks then the Russians living in Crimea will be up in arms protesting their vote did not count and other negative actions could occur. Then comes the sanctions from both sides. Our main concern is the flow of crude and natural gas through Ukraine from Russia to the European countries relying on that energy. We will have to wait and see and hope some semblance of normalcy returns to the region. Meanwhile those of us that have to try to make sense of it all and come up with recommendations for our readers and clients are left "scratching our heads" for now. I will offer my usual comments based on the basics of supply/demand whether anticipated or in reality for my readers. Now for some of those comments………
Interest Rates: June Treasury bonds(CBOT:USM14) closed Friday at 132-22, up 20/32nds on short covering after recent selling tied to the "confusing" statements by the new Fed Chair, Janet Yellen. She may have misspoken when she suggested the Central bank could begin raising interest rates about six months after ending its bond purchase program. We continue to feel Treasuries will remain in a range since we see no reason to expect rate changes either up or certainly not down since "zero" is as low as the Federal Funds rate can go albeit other rates are flexible. Hold strangle spread positions.
Stock Indices: The Dow Jones industrials(CBOT:DJ) closed at 16,302.77, up 28.28 points and for the week gained 1.5%. The S&P 500(CME:ESM14) closed at 1,866.40, down 5.61 points but for the week gained 1.4%. The Nasdaq closed at 4,276.79, down 42.50 points but managed a gain of 0.7% for the week. The activity on quadruple witching day played a role in the back and forth action in the indices. Stocks had declined on Wednesday after the new Fed Chair; Janet Yellen suggested the Fed could begin raising rates six months after the end of their bond purchase program. Stocks rallied after that when the Philadelphia Federal Reserve reported positive manufacturing data. The markets weigh each Fed statement and act accordingly due to the ramifications of any Fed action. We remain convinced the market is fast approaching the "rim" of a "black hole" and suggest strongly the implementation of risk hedging strategies for holders of large equity portfolios.
Currencies: The June U.S. dollar index(NYBOT:DXM14) closed at 80.26, down 9.3 points but managed a weekly gain after the Federal Reserve seemed to suggest rate increases sooner than earlier statements indicated after the Fed meeting. Any increase in rates attracts dollar investment even if the rate remains unchanged but Euro rates adjust lower. Other currencies traded as follows, the Euro(CME:ECM14) gained 13 ticks to close at $1.3792, the Swiss Franc(CME:SFM14) 15 ticks to $1.1339, the Japanese yen 29 points to 0.09793, the Canadian dollar 19 points to 88.96 and the Australian dollar 49 points to 90.35. The British Pound(CME:BPM14) lost 10 ticks to close at 1.6483. We are watching carefully the ongoing Ukraine situation and what the various sanctions from either the U.S. President or the Russian President will mean to global economies. For now stay with the dollar.
Energies: May crude oil(NYMEX:CLK14) closed at $99.46 per barrel, up 56¢ on short covering and against the weak U.S. dollar in which it is denominated. The main factor of course is the Ukraine crisis and concern that Russia controls the "spigot" for crude and natural gas flowing through Ukraine to Europe. We will have to wait and see if some calm can be restored to the ongoing rhetoric between the U.S. President and the Russian President. For now we remain bearish for crude based on supply/demand considerations.
Precious Metals: April gold(COMEX:GCJ14) closed at $1,336 per ounce, up $5.50 tied to the weak dollar and on short covering. For the week gold lost 3.1%, its largest weekly loss since Nov. 22. Once again we are on the sidelines even as geopolitical events are unfolding as related to the standoff between the U.S. and Russia over Ukraine. May silver(COMEX:SIK14) closed at $20.31 per ounce, down 12¢ and for the week lost 5.3% which was its largest weekly loss since September. We are on the sidelines here as well but for those that "must have" a precious metal in their portfolio, we continue to prefer silver over gold. With Russia a main exporter of palladium along with South Africa, where strikes have cut exports, prices moved accordingly with Palladium gaining 22.00 or 2.9% to close at $793.65. Platinum which is also produced by Africa closed at $1,436.50, up $7.00. Once again we prefer palladium over platinum solely on the basis of percentage gain possibilities.
Grains and Oilseeds: May corn(CBOT:CK14) closed at $4.78 ¾ per bushel, up slightly and remains near its recent highs since trading as low as $4.14 in December of last year. We are awaiting end of month reports on grains so no comment for now other than to suggest holding long positions but raising trailing stops. May wheat(CBOT:WK4) closed at $6.92 per bushel, down 11.75¢ on long liquidation after the sharp price gains tied to the drought in the Southern U.S. plans. We prefer the sidelines for now pending further data at the end of the month. May soybeans closed at $14.08 ¾ on recent cancellations of orders by China and expected Brazilian crop record even though initially thought to be lower than expected. We had been long soybeans for clients but got out recently. For now we prefer the sidelines.
Coffee, Cocoa and Sugar: May coffee(NYBOT:kck14) closed at $1.71 per pound, down 3.15¢ on long liquidation after the sharp run-up in prices tied to the concern over drought in Brazil and on disease. A fungus that attacked coffee has damaged over 20% of the global supply according to the Costa Rican Coffee Institute. Coffee traded as high as $2.0975 recently and was due for a correction. Current levels could hold but we prefer the sidelines. May cocoa closed at $2,951 per ton, down $23 on profit taking after the recent price gains. The global shortfall projected early this month prompted the sharp rally in cocoa prices from the $2,600 lows of last December to $3,000 and a correction was due. We had projected that cocoa would reach $3,000 and our goal has been achieved. For now we are on the sidelines. May sugar closed at 16.86¢ per pound, down 19 points and remains nearly midway between the recent low of 15¢ and recent high around 18¢. We are on the sidelines awaiting further fundamentals.
Cotton: May cotton(NYBOT:CTK14) closed at 93.53¢ per pound, up 1.35¢ and remaining near highs after rallying steadily from last Novembers low of 77¢. The Chinese farm support policy has withheld exports but its huge inventory could present a threat to prices going forward. For that reason we are on the sidelines but the purchase of some puts may be in order from here. Prices of a particular commodity can only be supported artificially for a time but at some point true supply/demand fundamentals will eventually prevail.