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February 2016 Archives

February 1, 2016

Slow and Steady Growth Keeps Pound Afloat

Monday, February 1, 2016

In many ways, the UK economy is mirroring the economy of the United States. Unemployment is falling, inflation remains low, and economic growth is slow, but steady. Housing prices continue to be an issue throughout the UK, especially in the expensive London region. Finally, the possibility of a British exit from the European Union continues to linger in the background.

Fundamentals

The FTSE 100 wasn't immune to the global market turmoil of January 2016. However, the FTSE began 2016 at a level of 6093 and ended on January 29 at 6083, almost unchanged for the month. That is in sharp contrast to the US equity markets which finished January down about 5%. The US unemployment rate is at 5%, while the UK's rate is at 5.2%. Both counties continue to have tightening employment, but without a large corresponding increase in wages, reducing the potential for wage push inflation. The Bank of England has kept interest rates at .5% for 82 months, and there is no sign that they are likely to raise rates anytime soon.

Technical Notes

Turning to the 3-month continuation chart, we see a neutral to bearish short-term trend for the British Pound. The 20-day Simple Moving Average (SMA) has been providing resistance. The 20-day SMA is also below the 50-day SMA and the two moving averages are diverging. 14-day Relative Strength Index is a neutral 42.82.

Dale Jennings, Commodity Analyst

February 2, 2016

Kuroda Jolts Yen Bulls

Tuesday, February 2, 2016

Japanese Yen futures took a sharp nosedive last week after the Bank of Japan announced a negative interest rate strategy on Friday. This aggressive action from the BOJ took many traders by surprise, as much of the spec position was tilting toward the long side of the market. BOJ Governor Haruhiko Kuroda has gone to great lengths to stimulate the Japanese economy since taking over the central bank in 2013. Kuroda has swollen up the central bank's balance sheet to three-quarters the size of Japan's economy with aggressive quantitative easing and is now pushing banks to lend more.

Fundamentals

The negative interest rate policy should not be a surprise to traders, although its announcement on Friday certainly seemed to burn the bull camp. Japan has been suffering from slow growth and excessive savings for several decades now. The Yen had been a favorite of defensive minded currency traders looking to diversify away from US Dollars. Kuroda has tried to right the wrongs of the Shinzo Abe government, which helped send the nation into recession with its 2014 tax increase. The BOJ is attempting to fight off the threat of deflation with aggressive policy. Exports have been underperforming, business investment is extremely low, and consumer spending has been extremely soft. The negative interest policy is attempting to right two of those wrongs by giving consumers a disincentive to save and giving banks a reason to lend to businesses. The BOJ is under pressure to get the economy healthy again before a planned increase in the nation's sales tax kicks in next year. Despite the seemingly large impact of the negative interest rate policy, the negative impact on the Yen may have been overstated. Quantitative easing and aggressive monetary policy had already been factored into the exchange rate for the currency. The move can be seen as limiting the upside of the Yen rather than having a long-term negative impact.

Technical Notes

Turning to the chart, we see the March Japanese Yen futures contract selling off sharply on Friday. The market had confirmed a small double top last week, indicating a potential near-term reversal. Prices broke through near-term support at 0.8445, which can now be seen as the nearest resistance level. The closes below the 20-day moving average would suggest that a near-term high may be in place. It is of interest to note that the RSI indicator had peaked prior to the sell-off, which can be seen as bearish in the mid-term.

Rob Kurzatkowski, Senior Commodity Analyst

February 3, 2016

Resistance is Futile

Wednesday, February 3, 2016

The news is filled with stories on how current low price levels for Crude Oil are weighing on the global economy. Well, while parts of the global economy are certainly feeling the effects of cheap crude, such as Oil exporting countries and workers in the Oil production sectors, a far larger segment is a beneficiary of lower energy costs, including anyone who drives a vehicle or runs a business that is a large consumer of energy. In a sense, lower energy prices acts like a tax cut for end users with the funds saved from fuel costs being freed up for other expenditures or even for paying down debt or increasing savings, which is something most Americans can benefit from. While several pundits will continue to blame the sell-off in Oil prices as one of the key factors for the recent market volatility, I would counter that this correlation is ultimately circumspect in the long-run as history has shown that significant recessions in the past 40 years occurred partly as the result of a rise in Oil prices. While we all know that "past performance dose not necessarily represent future results", I will continue focus my beliefs on what history has taught until fully convinced otherwise.

Fundamentals

Today's Xpresso title must be what some bearish Treasury bond futures traders must think as the 30 year plus bull market for U.S. interest rates keeps rolling along. Yields on the benchmark 10-year Treasury Note has fallen to 1.874% as of this writing, which is the lowest yield since April of last year. Investors looking to move assets away from global equities, which have experienced increasing volatility of late, are finding U.S. Treasuries "appealing", despite relatively low yields, as alternatives such as European and Japanese Government bonds are trading at even lower yields than their U.S. equivalents. In the coming weeks, interest rate traders will turn their attention to the next Federal Open Market Committee (FOMC) meeting scheduled for March 15-16. Late last year, it appeared that the Fed was prepared for up to 4 separate 25 basis point interest rate hikes in 2016 beginning at the March FOMC meeting. However, the current economic climate is not what the Fed expected to start 2016 and market participants in Fed Funds Futures are currently pricing in only a 14% chance of a Fed rate hike at the March FOMC meeting. In fact, looking out to the December meeting, the current odds of a rate hike are less than 50% as a sense of pessimism seems to have been imbedded into traders psyche of late, which is ultimately good news for those trend following traders who remain bullish on U.S. Treasury futures.

Technical Notes

Looking at the weekly 10-year note yield chart, we notice that the downtrend line drawn from the major high made in 2007 remains intact, which could set the stage for a test of the January 2015 low yield near 1.65 percent. However, there is some near-term support at 1.843% but little beyond this until 1.65%. The 14-week RSI is weakening, but remains above oversold levels with a current reading of 37.16. Near-term resistance is seen at 2.377% with major resistance at the June 2015 high yield of 2.489%.

Mike Zarembski, Senior Commodity Analyst

February 4, 2016

Commodity Bear Market Extends Aussie's Woes

Thursday, February 4, 2016

The Australian Dollar remains in a rut, depressed by weak commodity prices. Many traders have also been risk averse to begin 2016, which has not been favorable to risky, economically sensitive currencies tied to commodities. The collapse in heavy metal and Oil prices has been especially tough on the Aussie Dollar. The country is a major metal exporter and has a close trade relationship with China. Australia is not a major player in the petroleum market, producing an estimated 478,000 barrels a day, which puts it in 30th place globally. However, negative Crude Oil sentiment has weighed on the price of commodities across the board.

Fundamentals

The Australian economy was greeted with more negative economic data on Wednesday, as the country reported a A$3.5 million deficit in December. This is a 30% increase from the November deficit of A$2.7 billion and A$1.2 billion worse than the A$2.3 billion deficit that analysts had forecast. While this was the fourth largest deficit on record, it could have been even worse had the Aussie Dollar not been so comparatively weak. The fact that the country exports heavily is why the Reserve Bank of Australia (" RBA") has done nothing to intervene in the currency's collapse. When China's economy was booming, Australia found itself in a very enviable position due to the close partnership between the countries as supplier/consumer. Now that things have turned sour in China's manufacturing sector, Australian exports are decreasing due to both price and volume declines. The RBA's most recent policy statement indicated the bank intends to keep the interest rate at its current 2.0% level. Friday's retail sales data may give a bit more insight on how the Australian economy is currently tracking.

Technical Notes

Turning to the chart, we see the March Australian Dollar contract bouncing back above the 0.6945 level. Prices could gain a bit of momentum if they manage to close above near-term resistance at the 0.7345 mark. On the downside, new lows could mean the Aussie may test the 0.6510 level, or possibly the 0.6275 level. The RSI indicator has gone from oversold conditions to nearing overbought territory, which may inhibit advanced in the near-term.

Rob Kurzatkowski, Senior Commodity Analyst


February 5, 2016

Will Non-farm Payrolls Report Brighten-up a Gloomy Start to 2016?

Friday, February 5, 2016

Economists are lowering their expectations for this morning's Non-farm payrolls report for January. Current expectations are for about 190,000 jobs being created last month vs. 292,000 jobs created in December. Private sector employment is expected to have increased by 185,000 jobs. The unemployment rate is expected to remain steady at 5%. Some of the other figures being reported of note include average hourly earnings (+0.3% expected) as well as average hours worked (unchanged at 34.5 hours).

Fundamentals

U.S. equity prices continue their volatile start of the New Year as traders continue to show concerns about slowing economic growth both globally as well as in the U.S. While this morning's Non-farm payrolls report will get the most attention from traders this week, there were several other economic reports released earlier that were not providing a very optimistic picture of growth domestically. Yesterday, weekly jobless claims rose to 285,000 for the week ending January 30, up 8,000 from the prior week and the third increase in the past four weeks. The hike in jobless claims is becoming troubling as labor growth has been a relative bright spot for the U.S. while corporate earnings reported so far have generally been a mixed bag for investors. Analysts have ratcheted down their expectations for employment gains last month following the release of the ADP National Employment Report which showed that private sector jobs increased by 205,000 in January, down from 257,000 jobs created in December. Service providers created 192,000 jobs according to the ADP report, but the widely watched Manufacturing sector showed no job growth last month and has been the weakest sector of late. Equity prices have rebounded moderately the past two weeks as traders are beginning to believe that the Federal Reserve will have to reassess its outlook for raising interest rates in 2016 given current economic growth levels and no signs of rising inflation pressures. So unless we see a major upward surprise in the employment data today it may be difficult for the Fed to justify another rate hike at the March Federal Open Market Committee meeting.

Technical Notes

Looking at the daily chart for the e-mini S&P 500 futures, we notice price rebounded off of 2 year lows as the index made a "reversal" on January 20. While the market remains above the 20-day moving average, which is generally viewed as bullish for short-term traders, we should note that trading volume has trended lower during the recent rally, but remains at overall elevated levels when compared to what we saw in the fourth quarter of 2015. The 14-day RSI has rebounded off of oversold levels and is now reading a more neutral 44.66. The January 8 high of 1964.75 is seen as the next resistance level for the March futures, with support found at the January 20 low of 1804.25.

Mike Zarembski, Senior Commodity Analyst


February 8, 2016

The Year of Volatility

Monday, February 8, 2016

Today is the Chinese New Year and the Year of The Monkey. In the financial world, volatility has been the dominant theme since the start of 2016. Traders were eagerly anticipating the January nonfarm payroll report last Friday. The extreme volatility in the equity markets during January had many investors examining economic data to determine the date of the next Fed rate hike. The Fed did finally raise rates in December of 2015, but they are still at a very low .25% rate by historical standards.

Fundamentals

Nonfarm payrolls increased by 151,000 in January 2015. This was substantially lower than December of 2015 which was revised downward to 262,000. November 2015 was revised upward to 280,000. In addition, the unemployment rate dropped below the 5.0% natural rate of unemployment to 4.9%. Average earnings increased by .5%, indicated potential wage push inflation for the future. Unlike the previous 2 years, most of the United States didn't see brutal winter weather in January, potentially affecting hiring. U.S. equity markets responded with a sharp sell on Friday, continuing the volatility that has been the theme for early 2016.

Technical Notes

Turning to the 6 month continuation chart, we see that the mini Dow has just bounced off a double bottom in mid-January which retested the August lows. The short term trend is bearish, with the 20 day Simple Moving Average (SMA) not only below the 50 day SMA, but the curve of the 20 day SMA is much steeper than the 50 day SMA. Still there are some signs of a possible reversal as recent trading has shown the mini Dow breaking above the 20 SMA, which was providing resistance. 14 day Relative Strength Index is a neutral 48.5.

Dale Jennings, Commodity Analyst

February 9, 2016

Golden Start to the Year

Tuesday, February 9, 2016

Gold futures had their best week in five months due to weakness in both the US Dollar and stock prices. Last week's weakness in the greenback culminated with the sharp sell-off after the Non-Farm Payrolls report on Friday. The report showed the US economy adding 151,000 jobs in January, falling short of the consensus estimate of 190,000. This underperforming number cast enough doubt on the economy that it shifted the interest rate outlook for traders.

Fundamentals

Gold futures have gotten a huge boost from the global equity sell-off since the beginning of the year, with China leading the way. Traders may continue to look for safe instruments if the global equity rout continues. The non-farm payroll data drastically reduced the likelihood of an interest rate increase in the March FOMC meeting. This could mean a weaker US Dollar, which could be viewed as beneficial for Gold prices. Inflation is really a non-factor at this point. The lack of economic growth around the world means raw materials are largely well supplied. Energy prices, which were the engine for inflation in the 2000s, have been extremely soft as well. In fact, Europe and Japan are more concerned about deflation than inflation at this time. Likewise, it seems as though supply and demand are on the back burner for metals traders at this time. Instead, traders may continue to focus on the defensive aspects in the near-term.

Technical Notes

Turning to the chart, we see the April Gold contract taking out resistance near the 1175.00 level and the near-term high of 1187.90. This suggests a test of the 1225.00 level could be in the cards for the Gold market. The market could consolidate or pull back in the near-term due to technically overbought levels. The RSI indicator is currently near the 90.0 mark, meaning the market likely can be viewed as fairly overbought.

Rob Kurzatkowski, Senior Commodity Analyst

February 10, 2016

Bull Market in the Making for Precious Metals?

Wednesday, February 10, 2016

While Gold and Crude Oil are currently on divergent price paths, I wanted to take a look at how the current Gold to Oil ratio compares to historic trends. During the post WWII era the ratio of how many barrels of Oil one ounce of Gold could buy tended to range between 10 to 25 barrels of Oil per ounce of Gold, with outliers below 10 and above 30 occurring only rarely. As of this writing and using the April expiration futures, the current ratio has Gold buying 37.42 barrels of Crude, which is at an extreme level going back 70 years. While it is rarely wise to try to pick tops or bottoms in strongly trending markets, one has to think that historical norms will eventually prevail but attempting to time such an event is an extremely difficult endeavor.

Fundamentals
While it appears that most market precipitants have become laser focused on the plight of energy prices as the poster child for the slump in commodity prices, one market sector--precious metals, appears to have sent the bear back into hibernation as metal bulls appear poised and ready to stampede. Gold futures are performing the best with the lead month April futures now trading at its highest level since June of last year on so called "safe haven" buying, as well as a weakening U.S. Dollar (down about 2% for far in 2016) as traders have all be given-up on a Federal reserve interest rate hike at the March federal Open Market Committee Meeting. While one could argue that the Gold rally is an anomaly given its role as a "flight to safety" investment in times of economic uncertainty, we are also seeing the more "industrial" of the precious metals such as Silver and Platinum post multi-month highs. Asset flows have been increasing for the major Gold ETF's, with some spillover buying seen in Silver as well. Large speculators are starting to add to existing long positions in both Gold and Silver according to the most recent Commitment of Traders report. During the reporting period ending February 2, non-commercial traders added just over 15,000 new net-long positions to raise the overall net-long position to over 83,800 contracts. For silver, the additions were more moderate with nearly 1,400 new net-long positions added to bring the total net-long position to just over 37,400 contracts. Both these net-long positions are well off of extreme levels seen in the past which could signal additional buying pressure emerging should upcoming resistance levels fail to hold and trend following funds increase their net-long holding at new multi-month highs.

Technical Notes

Looking at the weekly continuation chart for Gold futures we notice that prices have staged what appears to be a neat 50% retracement of the historic bull market starting at the major low back in 1999 to the historic high of 2011. Prices have once again moved above the 20-week moving average (MA) and are now testing the 100-week MA which is currently near the 1200.00 price level. The 14-week RSI has managed to avoid falling into oversold territory since mid-2013 and has now moved to a more neutral to bullish reading of 58.40. There is some significant chart resistance in the 1230.00 to 1250.00 price area, but that still leave ample room for further upside pressure until this level is tested. Downside support is seen at the December 2015 lows near the 1050.00 price level.

Mike Zarembski, Senior Commodity Analyst


February 11, 2016

How Low Will the Dollar Go?

Thursday, February 11, 2016

The US Dollar Index has had a rocky start to 2016, driven lower in recent sessions by lukewarm economic data. It looks as though defensive traders have been moving out of the greenback in favor of hard assets, such as Gold and Silver. The congressional testimony of Fed Chair Janet Yellen offered little to bolster the bull camp. She dismissed the idea that the FOMC would be prepared to slash rates if the US economy begins to falter. Yellen made mention of aggressive action from other central banks , which help stimulate the global economy and avoid the need for a Fed rate cut. While this appears to offer some underpinning for the US Dollar Index, the testimony did not exactly inspire much confidence in the US economy or greenback.

Fundamentals

While Fed Chairwoman Yellen's testimony did not rule out an interest rate increase in 2016, the central bank is expected to keep interest rates static for the remainder of the year. As a result, the upside in the greenback could be seen as limited, barring a drastic negative shift in economic conditions overseas. Currency volatility is also on the rise, which, in theory, should favor the US Dollar. Implied volatility of the Euro versus US Dollar reached the highest level since June 2012. Yen versus greenback implied volatility is at the highest level since July 2013. While this should be favorable to the Dollar, in practice, traders have shunned the currency in favor of precious metals, which have seen a resurgence in recent weeks. Economic conditions in the US have been less supportive of growth, which could be weighing on the Dollar. The US economy is continuing to add jobs, but the pace of the job growth could slow if other factors do not improve.

Technical Notes

Turning to the chart, we see the cash Dollar Index (DXY) breaking support at the 96.40 level. The next significant support level can be found around the 94.00 mark, with minor support just below 95.00. The daily chart formed an inverted flag pattern. The breakout from the pattern suggests the cash Dollar Index could test levels as low as 93.00. The result of the recent sell-off has been oversold technical conditions on the RSI, which could slow DXY's slide.

Rob Kurzatkowski, Senior Commodity Analyst

February 12, 2016

Treasury Yield Curve Signaling Slower Economic Growth Expectations

Friday, February 12, 2016

U.S. Treasury yields continue to decline, with the 10-year Treasury note yield falling to an intra-day low of 1.53% on Thursday. This is the lowest yield for this benchmark rate since the summer of 2012. As most interest rate traders will recall, the summer of 2012 is when we saw record low yields for the 10-year notes at just above 1.40%. While current yields do not provide much benefit for investors in the long-run, if we look towards the yields available in Japan and most of Europe where negative rates can be found, 1.50% for U.S 10-years is relatively high compared to similar quality government debt.

Fundamentals

Treasury bond traders are becoming pessimistic on the state of the global economy as the yield curve continues to flatten. On Thursday the 2-yr/10-year yield curve fell below 1% 10-year premium dropping 20-basis points in a week's time. A flattening yield curve is seen as a signal of slowing economic growth and generally hurts banks whose margins are squeezed as the generally borrow short-term and lend long-term. The longer-end of the curve received a boost from strong buying interest during the U.S. Treasury's sale of 23 billion of 10-year Notes on Wednesday. This week also saw testimony to Congress from Federal Reserve Chair Janet Yellen who said little to completely rule out an interest rate hike at the March Federal Open Market Committee Meeting (FOMC), but did note the risks to U.S. economic growth from a stronger Dollar and economic difficulties abroad. While Ms. Yellen would not rule out a March rate hike, traders in Fed Fund futures appear to have given up hope as the March contract is now pricing in only a 6% chance of a rate hike at the March 15 & 16 FOMC meeting. While there is some talk in the media about a possible recession, if history is any guide, we would need to see the yield curve become inverted (a condition where short term rates are above longer term rates) and start to see employment start to weaken. Two conditions that we have not seen met so far.

Technical Notes

Looking at the Daily continuation chart for 10-year Treasury note futures, we notice prices breaking above its recent price consolidation and setting up a potential test of the July 2015 highs above 135-00. Prices are pulling away from both the 20 and 200-day moving averages and we are seeing moderate to heavy trading volume during this market rally. The 14-day RSI is now well into overbought territory with a current reading of 79.55. The September 2011 high of 131-30 is seen as the next resistance level for the March futures with support found at 130-00.

Mike Zarembski, Senior Commodity Analyst


February 17, 2016

Will Corn Outperform in 2016?

Wednesday, February 17, 2016

While there is some potential optimism for a rally in new-crop Corn prices as the North American growing season begins in the next few months, the outlook for old-crop Corn prices remains bearish, especially as the South American harvest picks up steam. Corn from Argentina and Brazil will provide stiff competition for U.S. exporters, especially if the U.S. Dollar remains strong when compared to the Real and Peso. Both large and small speculators are now holding net-short positions in Corn futures, with the most recent Commitment of Traders report showing the combined speculative net-short position totaling over 85,000 contracts as of February 9.

Fundamentals

With heightened volatility seen in the Equity, Oil and Gold markets to start the New Year, less volatile markets such as the Grain complex appear to have fallen off many traders' radar screens. Analysts are not forecasting any great market moves for the grains in 2016, although a few of the complex members have the potential to outperform current expectations. This morning we are going to take a look at the Corn market and what could be instore for prices in 2016. In 2015, Corn "outperformed" both Soybean and Wheat prices, falling 9.6% for the year, while Soybean and Wheat prices were down by 14.5% and 20% respectively. U.S. Corn ending stocks for the 2015-16 season are currently estimated at a very comfortable level over 1.8 billion bushels. However, if we only see a modest increase in planted acreage and reach trend line yields, we could see ending stocks dip slightly this coming season. However, any experienced grain trader will realize that weather conditions throughout the growing season can alter this scenario by the time the crop is in the bin, and with some forecasts calling for a potential La Nina weather event later this year; it is far from certain what this season's average yields will be. Even a moderate average yield decline of between 3 to 5 percent could see Corn ending stocks tighten considerably. With new-crop December Corn currently trading near 385.00, it appears that market participants are currently discounting any potential weather threat, or most likely have not yet turned their attention to the grain markets yet as Crude, Gold and Stock Indices have entranced the trading community.

Technical Notes

Looking at the daily chart for new-crop December Corn futures, we notice that prices are still in the midst of a down trend when drawn from the July 2015 highs at just over 445.00. The market tested the major low made back in August of last year and traded briefly below this support level in January before staging a moderate price recovery. With prices still below both the 20- and 200-day moving averages, Corn bears appear to still be in charge, although the 14-day RSI has turned up from near-oversold levels and is now reading a more neutral 46.76. The January 2016 low of 374.50 remains support for the December contract, with near-term resistance seen at the February 4 high of 395.00.

Mike Zarembski, Senior Commodity Analyst

February 18, 2016

Are Oil Leaders Close to a Deal?

Thursday, February 18, 2016

Crude Oil traders are keeping a close eye on a meeting between leaders from OPEC and non-OPEC Oil producing nations to discuss output. An agreement between members of the cartel with outside nations would mark the first such agreement in 15 years. What had many market observers surprised was the change of heart from Iran, which was previously against such measures. While Iran made no mention of possible production cuts, the country's Oil Minister Bijan Zanganesh stated he supported a production ceiling. Russia and Saudi Arabia, the largest producers attending the talks, agreed to freeze output at January levels instead of cutting production. This was disappointing news for many of the leaders who had gathered in Doha, Qatar, as they had hoped for a production cut to stabilize prices.

Fundamentals

The change of heart by Iran was surprising, to say the least. The country has increased its output by at least half a million barrels a day so far in 2016. Iran has been hesitant to cut its own production in light of sanctions being lifted recently. Tehran pointed the finger at other OPEC nations, who had increased their output in recent years, as the cause of the low Oil prices. This may make traders skeptical over how supportive Iran truly is of a potential deal. Likewise, traders could be hesitant to believe that Russia will keep up with its end of the deal. Russia reneged on a similar deal in 2001, which was the second year of Vladimir Putin's first tenure as President. The country also failed to hold up its end of the bargain during the Yeltsin regime.

Traders are looking for another weekly build in Cushing, Oklahoma Crude Oil inventory levels. It is the world's largest storage facility, holding approximately 60 million barrels of Oil, or around 12% of the US supply. There are fears that the facility is getting close to capacity, which could cripple the nation's production. Those fears may be unfounded. While it is true that the facility is estimated to be between 70-80% capacity, adding additional storage in the area should not be difficult. Overall, traders are looking for a build of between 3-3.5 million barrels of Crude Oil on today's EIA inventory report.

Outside markets have been a mixed bag for Crude Oil. The US Dollar Index has seen a small rebound in recent sessions, which may put a bit of pressure on Crude Oil prices in the near-term. The S&P has also seen strength in recent sessions, offsetting some of the negative currency pressure on Oil. The S&P looks as though it may be nearing a double bottom on the daily chart, which may lead to optimism spilling over into the Oil market.

Technical Notes

Turning to the chart, we see April Crude Oil close to confirming a double bottom, which could offer the market some momentum. Prices closed just below the 50-day moving average. A close above the average could give the Oil market momentum in the medium-term. The chart shows plenty of congestion on the upside, with some resistance coming in near 35.00 and more significant support around 38.15. A solid close above 38.15 could give a potential rally legs.

Rob Kurzatkowski, Senior Commodity Analyst


February 19, 2016

Hog Prices Higher but Exports Needed to Sustain Rally

Friday, February 19, 2016

New Trading Hours for Livestock Futures & Options Starting February 29

Effective Monday, February 29, Livestock Futures and Options (Live Cattle, Lean Hogs and Feeder Cattle) will now trade at the following times:
Monday to Friday 08:30 am to 01:05 pm Central Time (CT)


Fundamentals

Lean Hog futures prices have staged a recovery from 2016 lows, as market sentiment has turned positive for the time being. Lean Hogs have been the leader during the recent rally in the livestock sector as seasonal factors and strong retail demand for hams are helping to increase meat packer demand for market ready Hogs. However, in order for Hog price to continue to hold recent gains, we will need to see U.S. pork exports improve which could be a challenge in 2016 year given the current global economic situation. About a quarter of U.S. pork production is exported, with Mexico, Japan and Canada the leading buyers. China imported less U.S, pork last year down over 17% from 2014. The U.S. will need exports increase to help absorbs what is expected to be increased meat production across pork, beef and poultry.

Technical Notes

Looking at the daily chart for April Lean Hogs, we notice prices in a sustained uptrend following a nearly 2-month long price consolidation in November and December of last year. The 20-day moving average (MA) has crossed above the 200-day MA which is normally considered a bullish formation, but there are some other technical factors such as a moderate price reversal on Thursday following a move to 3 ½ month highs and a bearish divergence forming in the 14-day RSI that could signal a near-term correction may be near. 73.975 is seen as the next resistance level for the April contract with support seen at 67.900.

Mike Zarembski, Senior Commodity Analyst

February 22, 2016

Threat of a Brexit

Monday, February 22, 2016

It has been an interesting weekend in European politics. The prime minister of Great Britain, David Cameron reached an agreement with the European Union regarding concessions the EU would make in order to keep the United Kingdom as a member. Cameron then announced a nationwide referendum on remaining in the EU to be held on June 23. This promises to be a very heated debate as maverick London mayor Boris Johnson announced that he would be campaigning against the UK remaining in the EU.

Fundamentals

British Pound futures reacted violently when trading opened for the first time since news of the agreement and referendum was announced. The Pound sharply declined as traders reacted. Markets don't like uncertainty and the Pound sank as the US Dollar rose. The pound reached lows that haven't been seen since the financial crisis in early 2009. The Pound has been on a wild ride over the past 2 years with traders speculating on the Scottish independence referendum as well as the 2015 UK General Election. As of now, it looks like the British Pound will be volatile as traders react to news and polls leading up to the crucial vote in June.

Technical Notes

Turning to the 3 month continuation chart, we see several bearish trends. The recent rally failed to reach the level of the previous highs. Today's trading saw the Pound test the support level at 1.4080. Trading has recently fallen below the 20 day Simple Moving Average, which is acting as a short term resistance level. 14 day Relative Strength Index is showing as a mildly bearish 36.30.

Dale Jennings, Commodity Analyst


February 23, 2016

Energy Prices Spark Stock Rally

Tuesday, February 23, 2016

Stock futures followed up their best week of the year thus far with another strong showing on Monday. It seems as though the battered equity, raw material and energy markets have attracted some buying from traders who thought the sell-offs in these markets were excessive. Traders' appetites for risk has grown, but will this trend continue moving forward? It seems as though some of this risk has been driven by the decision by Russia and Saudi Arabia to freeze Crude Oil production levels, but traders have been pondering whether or not this will be enough to maintain a rally in petroleum prices. The Oil market is oversupplied with production maintaining its current levels, so it will be interesting to see if this Oil rally has any legs.

Fundamentals

Equity and energy markets have been almost mirror images of one another to start the year, so it may be prudent for stock traders to keep tabs on developments in Crude Oil in the near-term. Energies have not been the only driver of stocks in recent sessions. Earnings have been better than the diminished expectations, and there is some renewed optimism from China. Xiao Gang, chairman of the China Securities Regulatory Commission, was relieved of his duties after overseeing the meltdown of the Shanghai Composite Index. The effects of the stock market rout were felt around the globe and set off a domino effect of falling global equity indices. Investors welcomed his replacement, Liu Shiyu, who had previously served as chairman of the Agricultural Bank of China and was a deputy governor at the People's Bank of China. While this move can be viewed in a positive light and may help China's stock market repair, there are still many issues facing the Chinese economy, which threaten to derail recoveries in the US and Europe. The latest red flag comes in the form of an overcapacity warning, which threatens Chinese manufacturing. In the US, Chicago area manufacturing picked up more than expected, offering a bit of positive economic news

Technical Notes

Turning to the chart, we see the March E-mini S&P contract closing near the trigger line that would confirm a double bottom pattern on the daily chart. If the pattern is confirmed, it may mean a reversal of the recent sell-off is in the works. The measure of the move suggests that the E-mini S&P could test the fall 2015 highs. Failure to confirm the double bottom would suggest that the market could see consolidation or, possibly, a new wave of selling pressure if the March contract cannot hold recent lows.

Rob Kurzatkowski, Senior Commodity Analyst

February 24, 2016

Soybean Prices Under Pressure as South American Harvest Looms

Wednesday, February 24, 2016

March is the official start to the planting season in North America, as analysts sharpen their pencils to anticipate how much acreage will be planted to the major cash crops such as Corn, Soybeans and Spring Wheat. The biggest report that awaits grain market participants is the prospective planting report scheduled to be released on March 31. This report is rather notorious for producing large price swings in Corn and Soybeans, as this is the first "official" estimate for the potential size for this season's production. Prior to this report, we have the USDA Agricultural Outlook forum scheduled for this Thursday and Friday. Traders tend to key in on the USDA outlook for Grains and Oilseeds at the forum for estimates on how the USDA is sizing up this season's crop year. March 9 will see the release of the March crop production and supply/demand report, and also the release of the USDA season-average price forecasts. For longer-term forecasts, the USDA will release its agricultural projections through the year 2025 on March 18.

Fundamentals

It's harvest time for Soybeans in Brazil and Argentina, which should spur renewed interest in Soybean futures among speculators and commercial participants in the coming weeks. Soybean prices have been generally range bound since the start of the year, as weather conditions have generally cooperated with producers in the Soybean growing regions in South America. Now that the bean harvest has begun in Brazil and is about to start in Argentina, analysts and traders are preparing their estimates for the eventual size of this season's crop. The important Brazilian Soybean producing state of Mato Grosso is expecting a record crop this season and is seeing harvest running ahead of last season's pace at just under 40% completed. Private forecasters expect Mato Grosso's Soybean production to exceed 28.5 million metric tons, which is over 1 million metric tons above the estimate from Conab--the Brazilian state crop bureau. While it appears that South American Soybeans will continue to be a formidable competitor for U.S. producers in the export market in 2016, many traders will continue to look at infrastructure challenges of getting Brazilian Soybeans to ports for shipment, which could cause the U.S. to capture additional export business. However, current exchange rates for the Brazilian Real vs. the U.S. Dollar should encourage Brazilian Soybean producers to move crops for exports. With global Soybeans appearing more than ample currently, importing nations may hold off on purchases initially in the hopes of obtaining Soybeans at lower prices should "harvest pressure" selling weigh on futures prices.

Technical Notes

Looking at the daily chart for May Soybeans, we notice prices moving in an ever tightening range since basically October of last year, as the U.S. harvest was completed and South America experienced a rather benign growing season as far as weather scares were concerned. We are starting to see prices weaken on and falling below the 20-day moving average, which is encouraging short-term momentum traders to favor the bearish side of the market. The 14-day RSI is still holding near neutral territory, with a current reading of 47.72. While we do note that trading volume has been steadily rising, much of the increase is due to rolling of March positions into the May futures ahead of First Notice Day on February 29. Support for the May contract is seen at the February 9 low of 863.50, with resistance seen at the February 2 high of 890.50.


Mike Zarembski, Senior Commodity Analyst

February 25, 2016

Dollar Giving Back?

Thursday, February 25, 2016

The US dollar had a sharp reversal in early trading yesterday, giving back overnight gains and turning slightly negative on the day. Trader sentiment seems to have shifted instead in favor of the Yen, at least in the near-term. The greenback, while generally seen as a defensive currency in times of unrest, benefited from the risk on in the equity markets. Fears of a British exit, or Brexit, from the EU also helped the Dollar Index to start the week.

Fundamentals

The Brexit is a significant event for the currency markets, even though the UK does not share a common currency with the rest of the European Union. A situation where Britain does in fact leave the EU or the EU bends over backwards to keep the country in the Union could have negative repercussions for both the Pound and Euro. If Britain is able to renegotiate and get the other EU states to bend to their demands, it sets a negative precedent where other economically strong and influential countries, like Germany, Italy and France, could decide that they do not like the current terms and pull a similar maneuver. In the US, the US Markit services PMI dropped sharply in February, falling from 53.2 to 49.8, the lowest level since October 2013 and falling back into contraction territory. This certainly puts a damper on those expecting further rate hikes this year, as recession fears are certainly not unwarranted. ECB Governing Council member Jens Weidmann said today that the euro zone is far removed from any deflation and warned against the side effects from prolonged periods of easy money and low rates. This could be taken with a grain of salt, as Mr. Weidmann is known to be a hawkish member of the bank.

Technical Notes

Turning to the chart, we see the cash Dollar Index (DXY) bouncing due to technically oversold condition, but the market does not appear to have any near-term momentum. Prices failed after flirting with resistance near the 98.00 level. The DXY moved above the 20-day moving average, which may suggest that a near-term low is in place. It is interesting to note that the momentum indicator has failed to keep pace with prices, which could be seen as negative. Furthermore, the daily chart appears to have formed a gravestone doji, which may hint at a reversal of the upswing.

Rob Kurzatkowski, Senior Commodity Analyst

February 26, 2016

Bears Controlling Natural Gas Prices as Spring Approaches

Friday, February 26, 2016

Weather forecasters are calling for more than half of the U.S. to experience above normal temperatures as we head into mid-March. The National Weather Service Climate Prediction Center is calling for the western half of the U.S. to experience above to well above normal temperatures from March 3 to Mar 9 in the recently releases 8 to 14 day forecast. The rest of the country is expected to experience more seasonal temperatures; with the exception of the Great Lakes and Ohio River Valley regions where below normal temperatures are expected.

Fundamentals

Natural Gas bears continue on the prowl following a bearish Energy Information Administration (EIA) gas storage report. The lead month April fell to a new contract low of 1.747 per 10,000 mmbtu on Thursday, as the EIA reported only 117 billion cubic feet (bcf) of Natural Gas was withdrawn from storage last week. Traders were looking for a draw closer to 136 bcf, which was still below the 5-year average of a 144 bcf draw. Gas prices have been reeling from a generally mild winter for most of the U.S. combined with more than ample production of Gas from shale formations, which has been a game changer for the Natural Gas market the past several years. During the week ending February 12, the Baker Hughes rig count shows the Natural Gas rig count fell by 2 to 102 which is the lowest Natural Gas rig count since Baker Hughes began recording in 1987. However, Gas storage levels are running nearly 29% above the 5-year average for this time of year and bullish traders are starting to fear that with spring weather fast approaching, Gas storage levels will be more than ample heading into summer.

Technical Notes

Looking at the daily chart for April Natural Gas futures, we note prices made a new contract low on Thursday, following the rather bearish EIA Gas storage report. Prices recovered from its lowest levels of the session following a price recovery in Crude Oil and the expiration of the March Natural Gas contract. The most recent Commitment of Traders report shows non-commercial traders are bearish on Natural Gas futures with an overall net-short position totaling 176,781 contracts as of February 16. The 14-day RSI has entered oversold levels with a current reading of 27.10. The combination of a large speculative short position with a RSI at oversold levels leaves ample room for a short-covering rally should Thursday's lows not be tested in the coming days. Thursday's low at 1.747 looks to be near-term support for the April futures, with resistance seen at the February 16 high of 2.033.

Mike Zarembski, Senior Commodity Analyst

February 29, 2016

Bonds On The Run

Monday, February 29, 2016

A plethora of economic data was released Friday. US GDP was revised upward for the 4th quarter to 1% from 0.7%. Consumer spending and personal income both rose by 0.5% in January. The core Personal Consumption Index (PCE) rose to a year over year rate of 1.7%. The core PCE is the Fed's preferred way of measuring inflation. Core PCE excludes the volatile and seasonal food and energy sectors.

Fundamentals

30 year bond prices have been on the rise since the beginning of 2016. Investors flocked to bonds as a safety measure since equity and commodity markets have been so volatile. Slower global growth has also fueled speculation that the Federal Reserve may not be likely to raise interest rates in the immediate future. However, today's economic data might change trader sentiment. In addition, equity markets have recovered from the January free fall.

Technical Notes

Turning to the 6 month continuation chart, there are signs of a potential reversal in 30 year bond prices. The 20 day SMA has been providing support and recent trading shows a potential for prices to drop below the 20 day SMA. If that happens, previous support often becomes resistance. 14 day RSI is a mildly bullish to neutral 58.04.

Dale Jennings, Commodity Analyst