Overview and Observation
A strange thing happened on my "way to the Forum." The bond king, Bill Gross, who founded the world’s largest bond fund, resigned on Friday just under what some thought was the "hammer of Thor", the threat of his firing. What his departure will mean for the bond markets is unclear but bears watching. His joining Janus Group was a surprise. The billions that could move from Pimco to Janus could be a market moving factor based on what is liquidated from one and added to the other. We will keep our clients posted as develops emerge.
Interest Rates: The December Treasury bond closed Friday at 127-22/32nds, down 4/32nds after trading as high as 138-07/32nds during the session. The "rush to safety" after the equity markets sold off sharply on Thursday pushed yields lower even against "calls for higher yields" by some economists based on the "glowing" economic data. Some of the factors that prompted the rally in bonds were a speech by ECB President Draghi "leaving the door open" for bond purchases. U.S. data included orders for durable goods posting an 18.2% drop in August and the 22.5% gain in July which was due to a decline in bookings for commercial aircraft. The weekly jobless claims reported Thursday showed the number of first time unemployment benefit applications rose by 12,000 to 293,000. The final reading from the University of Michigan/Thomson consumer sentiment index remained positive with a reading of 84.6 and above the August 82.5. We continue to view bonds as in a trading range and would hold spread positions. Roll over if necessary.
Stock Indices: The stock market had a roller coast week with the Dow moving triple digits up, then down, then up and closed the week with losses. The Dow closed at 17,113.19, up 167.35 on Friday but for the week lost fully 1%. The S&P 500 (CME:SPZ14) closed at 1,982.854, up 16.86, points but lost 1.4% for the week. The tech heavy Nasdaq closed at 4,512.19, up 45.45 points but lost 1.5% for the week. We have been warning of a "black hole" under the equity market for some time and have been criticized for our negative view on both the U.S. economy and the equity market. We could finally be on the verge of a correction and once again warn holders of large equity positions to avail themselves of our risk hedging strategies.
Currencies: The U.S. dollar index closed at 85.775, on Friday, up 47.2 points against most of its trading partners. The dollar benefited from the positive U.S. economic data which could portend a rate increase by the U.S. Federal Reserve. We do not believe a rate increase is viable at this time and would take some profits on the dollar longs or calls. The losses were sustained by the Euro, 67 points to $1.2688, the Swiss Franc 52 ponts to $1.0517, the japanese yen 52 points to 0.09155c, the British Pound 66 points to $1.6234, the Canadian dollar 46 points to 89.45c and the Australian dllar 18 points to 87.17c. The concern over the ISIS situation prompted a "flight to safety" and that has supported the dollar and the U.S. Treasury market.
Energies: November crude (NYMEX:CLX14) oil closed at $92.86 per barrel on shortcovering even though dollar denominated commodities suffered this week. Libyan oil production was a factor weighing on prices but could be offset by purchases by Asian oil refiners. We continue overall bearish for crude but only as it applies to our view of a stagnant global economic condition. We prefer the sidelines for now.
Precious Metals: December gold (COMEX:GCV14) closed at $1,215.40 per ounce, down $6.50 against the strong dollar. As I have been stating over the past months that gold has not responded to the global anxiety and conflict as has been the case in the past. I continue to suggest the sidelines for gold. It’s historic "safe haven" during such times no longer applicable. December silver (COMEX:SIV14) closed at $17.48 per ounce, down another 10c but in the case of silver, it’s applications could prompt renewed interest and it’s price between here and $15 could be viewed as a buying opportunity. We like silver on that basis. October platinum lost $12.20 to close at $1,302 per ounce which December palladium lost $18.65 per ounce to close at $783.55. Platinum lost 1.1% but palladium lost 3%. Our usual preference of palladium over platinum appears to have run it’s course. Stay out for now.
Grains and Oilseeds: Continuing selling pressure from hedge funds prompted another round of long liquidation and short selling pushing prices even lower. For now we prefer the sidelines in corn, (December closed at $3.23 per bushel), Wheat (December closed at $4.74 ¾ per bushel up 3/4c), and Soybeans (CBOT:ZSV14) (November closed at $9.10 ¼ per bushel, down 12 1/2c). Wait for fresh fundamentals but obviously our preference in some cases would be to the long side, but not right now.
Coffee, Cocoa and Sugar: December coffee closed at $1.8505 per pound, up 2.75c tied to ongoing estimates of drought damage for the Brazilian harvest. We could see further price gains for coffee but use stop protection. December cocoa closed at $3,315 per tonne, down $18 tied to the dollar strength but spec and hedge buying has been supportive for cocoa. We prefer the sidelines after this recent runup in price. March sugar closed at 16,55c per pound, up 47 points on pre-weekend shortcovering but until it provides us with a more definitive price gain through overhead resistance, we prefer the sidelines.
Cotton: December cotton closed at 61.87c per pound, up 47 points on shortcovering after recent weakness. Prices have declined by 4% after China, a top producer and consumer reported it would be issuing import quota without the 40% duty. It’s efforts to protect mills from higher prices has prompted the negativity for global cotton prices. We prefer the sidelines.