Bonds and equities bailed out by Fed

Market Commentary Week ending September 19, 2014

Overview and Observation

The U.S. economic data is provided via a myriad of "mirrors". The leading economic index rose 0.2% in August to 103.8 according to the Conference Board on Friday. The assumption is that the U.S. economy is "gaining traction". The Conference Board, a New York based membership and research group claimed that out of their 10 indicators that make up the gauge, "three made positive contributions in August." The no vote on separation of Scotland from Great Britain was also viewed as a positive. The havoc that would emerge from Scotland’s separation would affect the global financial community tied to their debt. Also, Great Britain made it known that Scotland would not be able to use its currency as that for Scotland should there be a yes vote. All in all my concerns are that of ISIS, the fragile Palestinian/Israeli peace, the Russian intentions for Ukraine, the ongoing antagonism between China and Japan, and the Russian jets teasing the U.S. jets. Any one of the foregoing could emerge as a market affecting situation.

Interest Rates: The 30-year U.S. Treasury bonds closed Friday at 136-22 as the U.S. Federal Reserve statement contradicted prior expectations of a moving up of its pace of interest rate increases. The statement was "dovish" and helped both the bond and the equity markets on Friday. Yields has been rising as prices declined in anticipation of the Wednesday Fed statement and traders covered shorts and helped the market close higher. We continue to expect rates to remain low and that could pose a problem for those on fixed incomes. Their only choice to enhance yields has been to participate in the equity markets. We warn against continuing that investment policy. Hold spread positions.

Stock Indices: The last hurrah? The Dow Jones industrials closed at 17,280.06(CBOT:DC), up 14.07 points and managed its 18th record close so far this year. The S&P 500 closed at 2,010.41(CME:SPZ4), unchanged but for the week gained 1.3%. The Nasdaq closed at 4,579.79, down 13.64 points. Much of the action was tied to the Alibaba initial public offering which came out at $92, up from the $68 issue price and immediately moved higher to around $99 before falling back to around the opening level. The euphoria tied to the IPO was short lived and could have been the final nail in the market coffin. We once again urge a conservative approach to investment management and the implementation of risk hedging programs for holders of large equity positions.

Currencies: The December U.S. dollar closed at 84.855(NYBOT:DXZ4), up 42.5 points as investors and traders had been concerned over the potential impact that may have emerged should Scotland voted to secede from Great Britain. After the vote the British pound initially rallied but later sold off and closed at $1.6291, down 71 points. The pound moved back and forth as various indications changed as to the vote. The dollar gained, benefiting from the confusion in Europe and currency losses included the Euro $1.2844(CME:ECZ4), down 80 points, the Swiss Franc(CME:SFZ4) 67 points to $1.0643, the Australian dollar 44 points(CME:ADZ4) to 88.79c, and the Japanese yen 18 ticks to 0.09184(CME:JYZ4). The Canadian dollar managed a 5-point gain closing at 91.14(CME:CDZ4). Our bullish bias toward the U.S. currency continues unabated.

Energies: October crude oil lost 66¢ to close at $92.41 per barrel(NYMEX:CLZ4). For the week crude managed a corrective rally of 0.2% after a two week losing streak. Increased U.S. oil production and supplies with lower estimates for demand could push prices still lower. We remain overall bearish for crude. Natural gas for October lost 7¢ to close at $3.8370 per million British Thermal units(NYMEX:NGV4). For the week Nat gas lost 0.5%. We moved out of Natural Gas last week. Stay out for now but coming into the winter expect a resurgence of demand for nat gas.

Precious Metals: December gold(COMEX:GCZ4) closed at $1,216.60 per ounce, down $10.30 and for the week lost 1.2%. September silver closed at $17.78 per ounce, down 67¢. Precious metals, as we have reported in prior commentaries, have failed to respond to geopolitical events and for that reason we remain sidelined. October platinum closed at $1,337.30 per ounce, losing $12.20 while December palladium lost $19.05 or 2.3% to close at $812.35. While our favorite of the white metals has been palladium, we are on the sidelines here as well. Both metals are catalysts in the energy industry and with similar applications for the auto industry, we had favored palladium. Stay out for now.

Grains and Oilseeds: December corn closed at $3.31 ¾ per bushel, down another 6.5¢ and remains at recent lows(CBOT:ZCZ4). Reports that U.S. Farmers would collect 14.395 billion bushels of corn with yields by the USDA predicted to total 171.7 bushels per acre up from its August estimate of 167.4. We are on the sidelines. December wheat(CBOT:ZWZ4) closed at $4.74 ¼ per bushel, down 14.25¢ tied to world wheat output rising to a record 719.95 million metric tons in 2014-15. Stay out for now. November soybeans closed at $9.57 ¾ per bushel, down 13.75¢ or 1.4% also on gains in the soybeans harvest by the USDA. We prefer the sidelines in this group but prefer not to be short "anything that grows."

Coffee, Cocoa and Sugar: December coffee(NYBOT:KCZ4) closed at $1.7835 per pound, down 2.85¢ or 1.6%. The official Brazilian crop bureau upgraded its estimate for the country’s coffee production and could prompt further price "erosion". The estimate is below the 2013 harvest and due to the drought could prompt further production estimate reductions. The weaker than expected vegetative growth required for trees to bear cherries for the 2015 crop, could prompt short covering and another run to the $2.00 per pound area. We like coffee from here but use stop protection. December cocoa closed at $3,262 per tonne, up $70 or 2.2% tied to fears that the Ebola virus could affect West African output. Cocoa traded at a three year high and we could see further price gains. I like cocoa even from these levels but use stop protection. March sugar closed at 15.85c per pound, down 11 ticks and remains on our "no interest list" for now.

Cotton: December cotton(NYBOT:CTZ4) closed at 64.42¢ per pound, down 63 points or 1% after recent buying was tied to a slight decrease in domestic ending stocks according to the USDA report. The large global supply could continue to weigh on prices so we are on the sidelines in cotton.

About the Author

John has over 40 years experience at major U.S. Brokerage firms as Manager and Director of various International Divisions and is the founder of his own trading and brokerage firms. Over the years John has gained a wealth of knowledge and experience in all aspects of investments and trading.