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August 2015 Archives

August 5, 2015

Coffee Bear Market Grinding to a Halt?

Wednesday, August 5, 2015

Large speculators continue to add to their short positions in Coffee futures, while commercial traders are taking the other side of the trade. That was a quick summary of the data from the most recent Commitment of Traders report for the reporting period ending July 28th. Non-commercial traders added nearly 5,500 new net-short positions to increase their overall net short position to nearly 19,800 contracts. Commercials were net-buyers of just over 4,750 contracts to increase their net-long position to 16,669 contracts. Small speculative accounts continue to "bottom-pick," adding just over 730 new net-long positions to increase their overall net-long position to 3,122 contracts.

Fundamentals

While Coffee futures have followed the overall commodity sector during its current bearish funk, there appear to be some signs that the selling pressure may be waning. On the fundamental side, there is talk from a major Brazilian Coffee producer's group that this season's harvest, which is currently about 50%, will be smaller than most analysts were expecting. Conselho Nacional do Café (CNC) is forecasting Brazilian Arabic Coffee production will be below 32.1 million 90kg bags. This is nearly 3 million bags below the current USDA estimate of 35 million bags. Dry conditions early in the growing season were cited for the lower production estimate, as drought conditions may have impacted Coffee trees more than anticipated. CNC officials additionally cautioned that 2016 Coffee production may also see the effects of less than ideal weather conditions. Also supportive was how Coffee prices held relatively steady, despite the continued decline in the value of the Brazilian Real vs. the US Dollar. Normally, a weakened Real would encourage Brazilian producers to export Coffee, as they would receive a greater number of Reals in conversion from their sales in U.S. Dollars or Euros. However, it appears that Coffee exports are running behind last year's totals, which could be a sign that this year's production is running below expectations.

Technical Notes

Looking at the daily chart for September Coffee futures, we notice prices trading within a downward sloping channel formation since the end of February. Prices are now trading near the middle of the channel and are hovering close to the 20-day moving average (MA). The longer-term 200-day MA is still quite some distance away from current price levels, which will keep long-term Coffee bears in charge. The 14-day RSI has rebounded from near-oversold levels to a more neutral reading of 45.87. The July 27th low of 119.85 is seen as the next major support level, with resistance found at 132.50.

Mike Zarembski, Senior Commodity Analyst

August 6, 2015

Calm Before the Storm for Gold?

Thursday, August 6, 2015

Gold futures have moved very little over the past several sessions, forming a consolidation pattern on the daily chart. Economic conditions have triggered very little demand for the precious metal as a safe haven. Furthermore, recent comments from several Fed officials certainly point toward a rate hike in September, which may bolster the US Dollar. St. Louis Fed President James Bullard had indicated he was in favor of a rate increase in September. Yesterday, Atlanta Fed President Dennis Lockhart said it would take "a significant deterioration in the economic picture" to dissuade him from voting for a September rate increase.

Fundamentals

There has been some speculation that the decline in Gold prices could attract some value buying in Gold. However, there has been very little evidence to support this is the case. Gold has simply fallen out of favor with investors for the time being. Investors are expecting today's claims data to be near decades low levels, which will do little to help Gold's cause. Deflationary pressure, rather than inflation, has been a major topic of concern for investors. Indian and Chinese consumers have shunned the metal as an investment. Hedge funds are short Gold in near-record numbers, which may not necessarily be a bad thing for the bull camp. An extremely large short position could signal the market being extremely oversold. However, traders may wish to take this with a grain of salt, given the weak fundamentals for the metal.

Technical Notes

Turning to the chart, we see the August Gold contract continuing to consolidate below the 1100 level. Given the preceding down move, this suggests a downward bias on a potential breakout from the choppiness. The RSI indicator remains oversold, which could be supportive in the near-term.

Rob Kurzatkowski, Senior Commodity Analyst

August 7, 2015

Treasury Prices Remain Volatile Ahead of Employment Report

Friday, August 7, 2015

Economists and traders are expecting a modest improvement in job creation last month, with the average estimate calling for a gain of about 229,000 jobs in July. This would be a slight increase from the 223,000 jobs created in June. Private sector jobs were expected to have increased by 220,000, with the unemployment rate expected to remain unchanged at 5.3%. Analysts will also look closely at average hourly earnings, which are expected to have increase by 0.2%, as well as the average workweek, which is expected to remain steady at 34.5 hours. These two data figures will show if there are any signs of wage inflation, which is likely a key figure in the Fed's analysis for inflationary pressures on the economy.

Fundamentals

If the Federal Reserve is really "data dependent" in regards to the timing of its first interest rate increase since 2004, then recent economic reports appear to only muddy the waters, as there appears to be no clear trend as to the real strength of the U.S. economy. This week alone we saw "disappointing" data from the ISM Manufacturing Index, only to be offset by a stronger than expected reading from the Non-Manufacturing Sector. The ADP private employment data showed only 185,000 jobs were created in July, vs. an expected gain of 215,000, yet jobless claims continue to hold near multi-decade lows. Earlier this week, the President of the Federal Reserve Bank of Atlanta Dennis Lockhart commented that he believed the economy was ready to handle a rate increase in September which sparked a rally in Treasury yields, particularly in the short end of the yield curve which is more sensitive to Fed actions on rates. However on Wednesday, Fed governor Jerome Powell said he was still undecided whether the Fed should begin to raise interest rates at the September FOMC meeting, citing inflation that is running below the Fed's "ideal" of 2%. Traders of Fed Funds Futures are currently pricing-in about a 66% chance of an interest rate hike by the December 16th meeting, so whether it is September or December may ultimately be determined by how this morning's and next month's Non-Farm Payrolls reports stack up to the Fed's expectations on the strength of the U.S. labor market.

Technical Notes

Looking at the daily continuation chart for Treasury Bond futures, we notice a slight pullback in prices the past few sessions following an up move that took the lead month futures from 148-17 to 157-30 in 3 weeks' time. Prices are now above both the 20- and 200-day moving averages, however momentum, as measured by the 14-day RSI, has started to move lower, with a current reading of 57.31, vs. a reading of over 68 earlier in the week. The July 30th low of 153-13 looks to be support for the September futures, with resistance seen at the August 3rd high of 157-30.

Mike Zarembski, Senior Commodity


August 10, 2015

Reading the Pound's Tea Leaves

Monday, August 10, 2015

The British Pound has been a recipient of a flight to safety over the past few months of the Greek debt crisis for traders who wished to lessen their direct Euro exposure. However, the strengthening Pound may be hurting UK growth. Consistently steady USA job growth is adding to the speculation of a September Fed rate hike, which may also hurt the British Pound in upcoming months.

Fundamentals

There were mixed signals from the August 6th Monetary Policy Committee (MPC) of the Bank of England. They left the Bank Rate at .5%, but this vote was an 8-1 decision rather than a unanimous vote, which had been the standard over past months. However, many Bank watchers were expecting the MPC to be more hawkish, with an expectation that 2 or 3 members of the MPC would vote in favor of a rate increase. The continued low energy prices have kept inflation well under the Bank of England's 2% goal. This is causing speculation that any rate hikes will be pushed into 2016. The Pound fell sharply during August 6th trading, but then recovered as Bank Governor Mark Carney announced that a rate increase was, "Drawing closer."

Technical Notes

Turning to the 3-month continuation chart, we see the Pound in a very narrow trading range recently. The 20- and 50-day Simple Moving Averages (SMAs) overlap each other. After the MPC announcement, the British Pound did break below both the SMAs, perhaps signaling the start of a bearish trend. 14-day Relative Strength Index is at a neutral 41.93.

Dale Jennings, Commodity Analyst


August 11, 2015

Oil Teetering

Tuesday, August 11, 2015

Crude Oil futures are teetering above the $43.46 relative low from May of this year, as inventories and a stronger greenback continue to pressure prices. Recent hints at a September rate hike from regional Federal Reserve Presidents has bolstered the Dollar versus other major currencies. Commodities, as a whole, have been very soft of late. Weak fundamentals and lack of outside market support has resulted in weaker prices and a gradual, instead of steep, contango in the Crude Oil market.

Fundamentals

OPEC's Crude Oil output reached a 3-year high, even as Saudi Arabia cut production by 202,700 barrels a day -- the most in almost a year. The Oil cartel increased its output by 100,700 barrels a day to 31.5 million barrels a day in July. Iran's increased production was a major factor in the overall production jump. Iran pumped 32,300 barrels a day more in July than in June, lifting the country's output to 2.86 million barrels a day. This is the highest monthly output since June 2012, which coincided with stricter sanctions imposed on the country at the time. Shale Oil production could take a hit due to the slump in prices. Most operations require Crude Oil to be trading around $65 a barrel to turn a profit. The longest dated NYMEX contract, which is December 2023, settled below that figure. Many producers are reluctant to hedge with futures at current price levels, which does remove a selling force from the market. China had been a major concern for Oil traders, as economic activity in the country has been pretty dismal. However, July imports of Crude Oil rose to 30.7 million tonnes, which is a record high according to the preliminary report from the General Administration of Customs. However, China did also throw the currency markets, and by extension the Oil market, a curveball by devaluing the Yuan by the largest amount in 2 decades. This was reaction to weakening trade data. The move further bolsters the US Dollar and steals some of the thunder from the bullish imports data from China.

Technical Notes

Turning to the chart, we see the September Crude Oil contract trading just above support at the 43.46 level. Failure to hold this pivotal support level may trigger heavy selling pressure. The last time Crude Oil traded below this level was in the early part of 2009 when it traded down to around the $35 level. The RSI indicator is oversold, which may offer some support to prices in the near-term.


Rob Kurzatkowski, Senior Commodity Analyst


August 12, 2015

Grains Volatile Ahead of USDA Report

Wednesday, August 12, 2015

Average pre-report estimates for this morning's USDA crop report:

Corn Production: 13.4 billion bushels vs. 13.53 billion bushels (July USDA Report)

Corn Yields: 164.5 bushels per acre vs. 166.8 bushels per acre (July USDA Report)

Soybean Production: 3.69 billion bushels vs. 3.885 billion bushels (July USDA Report)

Soybean Yields: 44.5 bushels per acre vs. 46.0 bushels per acre (July USDA Report)

Fundamentals

The mid-summer doldrums were certainly in place in the grain markets the past two weeks, as many traders took their summer vacations ahead of this week's USDA grain production report. The August report is of particular interest to traders and analysts as it is the first report of the season based on actual in-field surveys. In July, we saw many parts of the Corn Belt experience near ideal weather conditions for Corn, with ample moisture and normal to slightly below normal precipitation during the critical pollination period. However, there is still some uncertainty regarding the extent of any damage to Corn yields in the eastern and southern portions of the Midwest, where flooding rainfall early in the growing season could have severely stunted crop development. Soybean traders are becoming a bit concerned about the 6- to 10-day weather forecast, which calls for above normal temperatures and below normal precipitation for most of the central portions of the U.S. and the heart of the U.S. Soybean growing region. August weather is critical for Soybeans as pod setting normally occurs this month, and the crop needs sufficient moisture to ensure proper pod and seed development. Monday afternoon saw the weekly release from the USDA on crop conditions, with the report showing 70% of the U.S. Corn crop was rated good to excellent. This was unchanged from the previous week. For Soybeans 63% of the crop was rated good to excellent, which was also unchanged from a week earlier.

Technical Notes

Looking at the daily chart for November Soybeans, we notice what could be a large "bull flag" formation, with prices currently hovering just below the upper trend line. The 20- and 200-day moving averages have converged, with prices holding just above both as of this writing. The 14-day RSI has returned to a more neutral level, with a current reading of 53.10. 996.50 is seen as the next resistance level for the November futures, with support found at the August 3rd low of 926.25.

Mike Zarembski, Senior Commodity Analyst

August 14, 2015

Traders See Late Summer Vacations Cut Short by Yuan Devaluation

Friday, August 14, 2015

In addition to the yuan devaluation, traders also had to deal with the August USDA crop production report. The USDA estimated the U.S. Corn crop at 13.686 billion bushels, which was over 350 million bushels above average analyst expectations. The USDA raised the average yield to 168.8 bushels per acre when traders were looking for a decline in average yields. The USDA also raised its projection for this season's Soybean crop to 3.916 billion bushels, which is about 200 million bushels better than expectations. Average Soybean yields were raised to 46.9 bushels per acre, vs. 46.0 in the July report and over 2 bushels per acre higher than traders' estimates. Following the release of the report on Wednesday, new-crop December Corn was down about 5% and new-crop November Soybeans fell nearly 6%.

Fundamentals

What will Janet do? That is the question being pondered by market participants following the surprising move by China to devalue its currency. The People's Bank of China (PBOC) announced on Tuesday that it would cut its daily reference rate by 1.9%, in what it termed a "one-time adjustment" to better align with supply and demand fundamentals. However analysts had a much different take on the PBOC's action, with concerns being voiced that the Chinese economy might be much weaker than anticipated. Also, that the Bank's action was a defacto start of a "currency war" in which the Chinese were prepared to devalue the yuan in hopes of making its exported goods cheaper and discouraging Chinese citizens from buying more expensive imported goods. Market reaction has generally been a sell-off of global equities and a sharp rally in highly rated government bonds, such as U.S. Treasuries and German Bunds. The biggest surprise has been the relative weakness in the U.S. Dollar, especially against the Euro. The market reaction here appears to be a move towards liquidation of long U.S. Dollar positions on the belief that the PBOC's move will force the Federal Reserve to refrain from raising rates at the September meeting. If the Fed is willing to remain patient and refrain from an interest rate hike this year, it takes away one of the major catalysts for a stronger "greenback" and indicates that traders apparently are willing to scale back or eliminate long Dollar trades until we get a clearer picture of the effects of the yuan devaluation.

Technical Notes

Looking at the weekly continuation chart for the U.S. Dollar Index futures, we notice that the market has moved into a consolidation period following the major run-up in the value of the Dollar that began in the summer of 2014. One could argue that a symmetrical triangle formation has developed. This is a chart pattern that is considered a period of price consolidation prior to a price move either above or below the two merging trend lines. Technicians will look for a price breakout from this pattern, ideally on higher than average volume, as a potential signal of the direction of the market's next move. Currently the market is hovering near the 20-day moving average, and the 14-week RSI has turned neutral, with a current reading of 55.04. 93.16 is seen as the next major support level for the front month futures, with resistance found at 100.38.

Mike Zarembski, Senior Commodity Analyst

August 17, 2015

Bonds Had More Fun Last Week

Monday, August 17, 2015

International currency uncertainty often causes a flight to safety with investors rushing in to buy 30 Year U.S. Treasury Bonds. The Euro and Greek uncertainty from earlier this summer was one such event. This week, China surprised international markets by devaluating the Yuan.

Fundamentals

On Tuesday, August 11th, the Chinese central bank shocked the international markets with an unexpected devaluation in the Yuan. The following day, a second devaluation occurred. Equity and commodity markets reacted violently, with sell offs in most equity markets as well as Crude Oil. Gold prices rose along with 30 Year Bonds. A devalued Yuan could lead to lower prices for Chinese imports, adding to more deflationary pressure in the U.S. Reduced energy prices, if sustained, could continue to indicate a very low rate of inflation, putting doubts into the minds of traders about a September Fed rate hike. However, positive U.S. economic news from an increase in July retail sales put a damper on the bond rally mid-week. Continued growth in the U.S. economy may very well keep a September rate hike on the table.

Technical Notes

Turning to the 3 month continuation chart, Bonds seem to have hit a resistance point at the 159-0 level. However, most other trends are still bullish. The 20 day Simple Moving Average (SMA) is above the 50 day SMA. Bond prices are above the 20 day SMA, another bullish sign. 14 day Relative Strength Index is also slightly bullish at 60.85.

Dale Jennings, Commodity Analyst

August 19, 2015

Bears "Bollin'" as Cotton Prices Rally

Wednesday, August 19, 2015

While it appears that the U.S. will produce a much smaller Cotton crop this season, the demand side of the equation appears to favor the bull camp as well. The USDA lowered its beginning stocks estimate by 500,000 bales as Cotton exports for old-crop Cotton have been running better than forecast. The wild card in any demand forecast is China and how the nation's slower growth forecast will affect its Cotton imports for the 2015-16 season.

Fundamentals

The rather sleepy Cotton market in 2015 received quite a wake-up call last week following the release of the USDA August Crop report. Here the USDA lowered its forecast for the U.S. Cotton crop to 13.08 million bales. This was down nearly 20% from last year's totals. It was a triple crown of reasons for the lower estimate, with the USDA lowering its average yield, and planted acreage estimates, as well as raising the amounted of acres that will be abandoned by producers. The sharply lower production estimate caught traders especially off guard as many were expecting a modest increase in production totals. Dry conditions appears to be responsible for the lower yield estimate as much of the deep south, from eastern Texas to the Carolinas is experiencing moderate to severe drought according to the most recent U.S. Drought Monitor. The 6 to 10 day temperature forecast is also calling for above to well above normal temperatures for the Cotton Belt which if accurate, may continue to lower crop condition ratings and potentially reduce yields even further as we had into the fall harvest season.

Technical Notes

Looking at the daily chart for December Cotton, we notice the market trading near the upper end for the nearly year-long consolidation pattern. However, the move from the lower band of this range near 61.00 to its current level near 67.00 occurred quickly following the release of the August crop report. There remains some solid resistance in the 67.00 to 68.00 price area with a weekly close above the 2015 high at 68.11 needed to pique the bullish interest of long-term trend following traders. Prices are now above both the 20 and 200-day moving averages and momentum is strong with the 14-day RSI reading above 60. The July 10 high of 67.23 is seen as the next resistance level for the December futures, with support found at the 200-day moving average, which is currently near 64.60.

Mike Zarembski, Senior Commodity Analyst

August 20, 2015

Dollar Flash Crash

Thursday, August 20, 2015

The US Dollar started off the week strong, bouncing off of support in the low 96.00's, but the currency is lower for the second straight session. The greenback saw a huge spike in volatility yesterday after a leaked headline for the FOMC minutes strongly suggested that the regional presidents were on board for a rate hike. The headline, which read "MOST FED OFFICIALS IN JULY SAW CONDITIONS FOR A RATE RISE NEARING", was misleading. It quickly became apparent that the hawkish headline was not even close to the actual minutes, which suggested the Fed was taking a wait and see approach. The market jumped on the headline and quickly nosedived after the news.

Fundamentals

The FOMC minutes definitely had a much softer tone that expected. Recent comments from several Fed regional presidents had a very hawkish tone, so the more dovish "wait and see" statement was somewhat surprising. Last week's surprising move from China to devalue its currency may have tied the Fed's hands with regard to a potential September rate hike, according to some traders. A weaker Yuan could lead to further deflationary pressure due to cheaper import prices as well as threatening the course of economic growth overseas. The bold move by the People's Bank of China, or PBoC, triggered a bit of panic buying in precious metals, sovereign debt, and other defensive instruments at the expense of the greenback.

Technical Notes

Turning to the chart, we see the cash US Dollar Index rebounding after appearing to have confirmed a small double top on the daily chart. The rebound, however, appears to have been short lived. It is not uncommon for prices to confirm a pattern then consolidate/pull back before continuing the direction the pattern would indicate. The measure of the double top suggests prices may test the 95.00 level in the near-term. The RSI indicator is giving near-oversold readings, which hints a possible support in the near-term.

Rob Kurzatkowski, Senior Commodity Analyst

August 21, 2015

Lack of Clarity from Fed Minutes Benefits Gold Prices

Friday, August 21, 2015

It appears that speculators are starting to dip their toes back to the long side of Gold futures according to the most recent Commitment of Traders report. Non-commercial traders added over 4,600 new-net long positions during the reporting period ending on August 11th. This increased their overall net-long position to just over 32,000 contracts. Non-reportable traders added over 6,800 net-long positions to reduce their net-short position to just over 7,500 contracts. Commercial traders are on the other side of the trade, increasing their net-short position to over 24,700 contracts.

Fundamentals

The Gold market has finally come back in favor by speculators, with prices rallying to 1-month highs on the belief that the Federal Reserve may remain in a holding pattern on interest rates past the September Federal Open Market Committee (FOMC) meeting. The Fed minutes from the July FOMC meeting were released on Wednesday, showing that some Fed officials were not in agreement that economic conditions both in the U.S. and globally were robust enough to begin raising rates. While a "dovish" Fed in the past has been welcomed by the equity markets, it now appears that market participants are losing patience with the lack of clarity from the Fed and are now turning to so called "safe haven" assets like U.S. Treasuries and even Gold. Gold had fallen out of favor with investors on the belief that the Fed would begin to raise interest rates this year. In turn, we have seen the value of the U.S. Dollar strengthen in anticipation of a rate increase. A stronger Dollar is bearish for commodity prices, as it makes them more expensive for non-Dollar buyers. Now it appears that many traders have thrown in the towel on trades that would have benefitted from a Fed rate hike, such as long the Dollar and short Gold and U.S. Treasuries. So now it remains to be seen if the recent rally in Gold is merely a bout of short-covering or the start of a bull move for the yellow metal.

Technical Notes

Looking at the daily chart for December Gold, we notice prices breaking out the upside following a moderate period of price consolidation. Prices are now back above the 20-day moving average and are trading above the previous resistance level of 1150.00. The 14-day RSI is strong, with a current reading of 66.50. The next major upside target appears to be the 200-day moving average, which is currently near the 1190.00 price level. Support is found at the August 18th low of 1108.50.

Mike Zarembski, Senior Commodity Analyst

August 25, 2015

Global Equity Meltdown Springs Oil Leak

Tuesday, August 25, 2015

The historically significant sell-off in the equity markets over the past several sessions has put heavy selling pressure on Oil prices. Front month futures fell below the $39 level for the first time since 2009 due to the shakiness of equity markets around the globe, most notably China. There has been increasing talk of the commodities supercycle coming to an end. In the 2000's, there has been so much talk about geological scarcity of raw materials and peak Oil that prices had been inflated very an extended period of time. Now that China and some emerging markets have seen a significant slowdown, traders have begun to rethink whether prices, in fact, were driven by true supply and demand economics or whether commodities were simply the benefit of circumstances. Low interest rates, lack of trust in capital markets and booming emerging market economies all helped fuel the rise of commodities, most notably energies. Traders were not the only ones that took notice of this, as energy companies had begun reinvesting in exploration and alternative means of extracting Oil and Natural Gas, which may have restored market balance. The recent oversupply of Crude Oil could be viewed as the result of high prices driving reinvestment.

Fundamentals

The People's Bank of China, until recently, seemed to have fairly good control of the country's economic situation. The bank had its difficulties stimulating economic growth, but that is a problem that plagues all central banks, as a whole. However, recent actions by the PBoC have been increasingly unpredictable and this seems to have shaken investors' faith in the bank's ability to cope with trade imbalance and other economic issues. This has fueled the sell-off in Shanghai, setting off a domino effect that has wreaked havoc on stocks around the globe. China is the world's largest user of energies and other raw materials. A worse than expected slowdown could have a crippling effect on Crude Oil demand. On the supply side, rig counts are up for the fifth consecutive week. This is somewhat surprising given the current price climate, which could make many projects unprofitable. Bijan Zanganeh, Iran's oil minister, said that holding an emergency OPEC meeting may be effective in stabilizing the Oil prices. At the same time, his country is considering pumping more in order to lose its market percentage. Furthermore, it is unlikely that Saudi Arabia, which has taken a leadership role in the cartel, will agree to an emergency meeting. Tomorrow's EIA inventory figures could show a weekly build and another build in Cushing, OK due to the refinery issues. It appears that the Whiting, Indiana BP refinery is close to coming back online, which may help alleviate some of the domestic Oil glut in the near future.

Technical Notes

Turning to the continuation chart, we see the October Crude Oil futures contract continuing to grind lower after breaking several key technical levels. The early price action is sharply higher this morning. Given the sharp down candle yesterday, a strong up day has the potential to possibly set up a V reversal on the daily chart. If the market is unable to build on the early strength, the next support area on the chart could be found near the $35 mark. The RSI has been oversold, but relatively flat for some time, which could be viewed as possible divergence.

Rob Kurzatkowski, Senior Commodity Analyst

August 26, 2015

Turnaround Tuesday--Extreme Edition

Wednesday, August 26, 2015

While the equity markets were in a corrective mode, VIX futures came back into the spotlight, with the lead-month September futures nearly doubling in just 4 trading days. Also of note was the move of the VIX term structure from a contango, where front month futures trade at a discount to more deferred months to a backwardation, in which the nearby months trade at a premium to more deferred months. Currently, the market is in a backwardation out to the December 2015 futures, with more deferred months seeing a nearly flat to modest contango out through April 2016.

Fundamentals

The old trading adage regarding so called "Turnaround Tuesday's" really became apparent this week as markets from Equities to Bonds to Currencies initially reversed course following the huge moves seen on Monday, only to give back the gains by the close on Tuesday. Overnight, the Peoples Bank of China (PBOC) announced that it was lowering interest rates by 0.25% as a signal that the PBOC was prepared to address the needs of the economy. In addition, bank-reserve requirements were lowered by 0.5% in order to hopefully increase the opportunity for bank lending. While Asian equity markets posted heavy losses on Tuesday, the "turnaround" started in Europe and continued into the U.S. trading session initially erasing a good portion of the losses seen on Monday. Selling pressure moved towards markets that posted sharp gains on Monday, such as U.S. Treasuries, Japanese Yen and Eurocurrency, in a reversal of the move into so called "safe-haven" assets. While one could argue that the steep price declines seen on Monday were excessive, it was more apparent that the U.S. equity market was losing momentum with prices merely threading water for most of the year. While the bursting of the Chinese equity "bubble" and the recent devaluation of the Chinese Yuan were cited as major factors for the recent market turmoil, a look at the chart for the E-mini S&P futures shows that the sell-off may have been more technical in nature once key support levels failed to hold. At that point it appears that liquidation selling took hold with momentum based traders adding to the selling pressure. The average displayed size of the bid and offer on the E-mini S&P also decreased dramatically on Monday, which made it much more difficult to move trades in "size," causing prices to move in points on orders that would normally move the market a few ticks. While it is anyone's guess on how long this volatility will last, it certainly appears that the summer trading doldrums will not occur this year.

Technical Notes

Sometimes when price volatility spikes, it is good to take a longer term view of the market to get a better assessment of the overall trend. So this morning we are looking at the monthly continuation chart for the E-mini S&P futures, we notice that the up-trend line drawn from the major low made back in March 2009 has not yet been tested, despite the steep price sell-off seen so far this month. In fact, we are still about 100 points, as of this writing, above the October 14 low of 1813.00 which is the next major support level seen on the monthly chart. The 14-month RSI is reading a very neutral 51.11, despite the steep sell-off seen this month. Upside resistance for the front month future remains at the May 2015 high of 2134.00.

Mike Zarembski, Senior Commodity Analyst


August 28, 2015

Commodities Recover on "Solid" GDP Figures

Friday, August 28, 2015

In addition to the rebound in commodity prices on Thursday, so-called commodity currencies also showed some strength with both the Australian and Canadian Dollars up nearly 1% vs. the U.S. Dollar and the Brazilian Real up close to 2%. Commodity and emerging market currencies have posted steep losses for most of 2015 as the apparent slowdown in China's economic growth hurt demand for raw commodities which generated tremors throughout nations relying on commodity exports for a large portion of their GDP.

Fundamentals

Commodity markets rebounded on Thursday following gains in Asian, European and U.S. equities as a relative sense of "calm" seems to be returning to global markets. Improvements in U.S. economic growth was highlighted on Thursday, as the U.S. Commerce Department reported that 2nd quarter GDP came in at a seasonally adjusted annual rate of 3.7%, which was significantly higher than the 2.3% growth rate originally reported. While there are still concerns on how China's economy is fairing, it does appear that the U.S. economy is sustaining its recovery. Most impressive was the rebound in commodities on Thursday, with Crude Oil up over 8%, Copper up nearly 4% and Lumber gaining 1.5% while the value of the U.S. Dollar up sharply vs. both the Euro and the Yen. Of course some of the gains in commodities can be attributed to short-covering by weak bears after many markets reached well oversold levels, technical traders are starting to see some signs of potential bottoming formations on many commodity charts. Economist are still divided on whether the Federal Reserve will finally begin to raise short-term rates at the next Federal Open Market Committee (FOMC) meeting, which is scheduled for mid-September, with traders stilling leaning towards the Fed waiting a bit longer prior to a rate increase, given the continued uncertainly in the global markets. However, in a counterintuitive way, a 25 basis point hike at the September FOMC meeting may actually be a bullish signal as it could be an indication of the Fed's belief that U.S. economic growth is sustainable and finally remove the uncertainty on when the Fed would finally take action on interest rates and we are all learning how markets ultimately abhor uncertainly.

Technical Notes

Looking at the daily continuation chart for Crude Oil futures, we notice Thursday's sharp rally is setting up a test of the 20-day moving average for the first time since late June as prices rebounded from oversold levels. After falling to a low near 20, the 14-day RSI has rebounded sharply and is now reading a more neutral 42.07. The August 19 high at 43.18 is seen as the next chart resistance level for the lead month October future, with support seen at the contract low of 37.75.

Mike Zarembski, Senior Commodity Analyst


August 31, 2015

Taking a Pounding

Monday, August 31, 2015

The British Pound abruptly reversed course from a recent upwards run. This comes as a bit of a surprise as much of the selloff was not due to any significant economic news. On Friday, the UK Office of National Statistics announced second quarter economic growth had expanded by 0.7%.

Fundamentals

There is a great deal of political uncertainty in the UK right now, which might be on the minds of traders. The Conservative party currently holds a slim 16 seat majority in the House of Commons. With such a small majority for the Conservatives, they cannot afford to lose many of those seats and still maintain their majority. Over the course of a 5 year parliament, resignations and/or deaths of Members of Parliament are inevitable, and the resulting by-elections will be closed watched. However, the opposition Labour party is in the middle of a highly divisive leadership election. The results of that election will be closely watched. In the event that the Conservatives lose their absolute majority in Parliament, they can attempt to maintain power by forming a minority government or by finding a coalition partner. If neither of these prove successful, new elections will called, perhaps well in advance of the next required election date of May 2020.

Technical Notes

Turning to the 3 month continuation chart, we see several bearish signs. After dropping below the 20 and 50 day Simple Moving Averages (SMAs), the British Pound has made a series of lower lows and lower highs. Looking back a bit further, the recent rally was unable to reach the previous resistance level of around 1.590. The 20 and 50 day SMAs are converged right now, but heading in a downward slope. Finally, 14 day Relative Strength Index (RSI) is a bearish neutral 37.17.

Dale Jennings, Commodity Analyst