Stocks Rebound Ahead of Fed Decision
S&P – Stock index futures are sharply higher this morning on expectations that the Fed will lower interest rates later today. The Fed’s quick action on the Bear Stearns meltdown seemed to have eased some of the worries regarding the banking sector, but the move could have set a dangerous precedent. If the central bank is going to bail out banks that have made poor decisions, there is little incentive to back off from engaging in risky ventures and trades. This morning’s PPI numbers showed inflation increasing briskly, which may put producers in a tough spot. They have to pass the rising costs on to consumers to remain profitable, but doing so may decrease sales due to economic conditions that are shaky at best. Inflation may continue to ramp up after today’s Fed decision, as funds and overseas investors may continue to divert capital into commodities. Fed Fund futures are pricing in a 90 percent chance of a 100 basis point cut and a 10 percent chance of a 10 percent cut. The June e-mini S&P chart remains bearish, despite yesterday’s spinning top followed by a strong morning. The chart has duped traders several times into thinking we have hit a bottom in the past two months, so it may take a significant upward move to restore confidence. Advances beyond 1340 would be encouraging in the near-term, but we may have to see prices move beyond 1400 before longs begin buying in full force. Support comes in at 1250.25, 1221.00 and 1189.25, while resistance can be found at 1311.25, 1343.25 and 1372.25.
Copper – The Copper market has recovered slightly this morning after dropping 15 cents yesterday. LME stockpiles continue to diminish, which has been the trend since the beginning of the year. Emerging market demand for the metal remains steady, but lacks the strength to support the sharp rise in prices since the market bottomed out in December. A rate cut could once again bolster commodity prices, but this positive news could be tempered by a decrease in building permits, which came in at 978,000, well short of the consensus estimate of 1.02 million. The upward revision in both housing starts and building permits for the month of January is somewhat encouraging, but not enough to convince traders that we are nearing the light at the end of the tunnel in the housing meltdown. Yesterday’s sharp sell-off in the May contract confirmed a downward breakout from a bearish consolidation pattern and drove the market below support at 3.75. Momentum continues to move lower despite the rise in prices, hinting that the market is continuing to lose strength. Support comes in at 3.5935, 3.5065 and 3.3635, while resistance can be found at 3.8235, 3.9670 and 4.0535.
Wheat – Wheat futures bounced back slightly in overnight trading after closing yesterday’s session limit down. Yesterday’s broad sell-off in commodities dragged the grain markets down, which could be seen in two different lights. On one hand, traders may believe that a sharp economic downturn coupled with tight lending could slow demand. On the other hand, traders may have pulled funds from commodities to make investments in the equity and treasury markets, indicating that we maybe approaching a bottom in the stock market and the Dollar. The first scenario has the potential to drag down commodity prices across the board and lead to more “normal” recessionary conditions of no growth and slow demand, while the second scenario could be supportive for the grain markets longer-term, as it hints at sustained demand. Time will tell which one of these scenarios will in fact play out. May Wheat bounced off of its uptrend line, suggesting the trend remains in tact for the time being. Breakdowns below1080 could confirm a double top formation and possibly a trend reversal. Support comes in at 1164.50, 1088.75 and 1046.25, while resistance can be found at 1282.75, 1325.25 and 1401.00.
Rob Kurzatkowski, Commodity Analyst
