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December 2016 Archives

December 1, 2016

Are Traders Looking Past Today's Non-farm Payrolls Report?

Friday, December 2, 2016


The following are pre-report estimates for the November Non-farm Payrolls report:

Non-farm Payrolls: +175,000 Jobs vs. +161,000 October

Unemployment Rate: 4.9% vs. 4.9% October

Hourly Earnings: +0.2% vs. +0.4% October

Average Workweek: 34.4 hours vs. 34.4 Hours October


Fundamentals

With the U.S. Presidential election out of the way and a high probability of a Fed interest Rate hike in December, it is not that surprising that many traders are taking a rather ho-hum attitude towards this morning's release of the November Non-farm Payrolls report. For those that are showing an interest, we got a glimpse of what may occur on Wednesday when the ADP National Employment Report was released. This report, which only involves private sector employment, showed that 216,000 jobs were created in November. The largest sector job gains were seen in Transportation, Professional Services and Education & Health. On the downside, we saw job cuts in Information & Technology, Mining and Manufacturing sectors. So baring a major surprise in the payroll figures, many traders expect the Federal Reserve to raise interest by 25 basis points following the 2-day Federal Open Market Committee (FOMC) meeting that ends on December 14. As of this writing, the December 2016 Fed Funds futures contract was pricing in an over 98% probability of a 25-basis-point rate hike this month. Looking forward, we have to go out to the June 2017 futures for an over 50% probability of another rate hike, but as we know, the Fed is "data dependent" and we should expect to see these probabilities adjust as we head into the New Year.

Technical Notes

Looking at the daily chart for December Fed Funds futures, we notice the market has been in a downtrend since late June of this year, as the market has nearly priced in a 25-basis-point interest rate increase by the Federal Reserve at the December meeting. As we get closer to the December FOMC meeting, we can expect to see only minor price fluctuations compared to the price activity earlier in the year, as it becomes more apparent from comments from Fed officials that an interest rate increase is expected. Should the Fed "surprise" the market by either raising rates by more than 25 basis points or not raise rates at all, we should expect to see a price "spike" either up or down as market participants are forced to price in the reality of the Fed's action at the December meeting. Support is seen at 99.450, with resistance found at 99.550.

Mike Zarembski, Senior Commodity Analyst


December 12, 2016

A Taper by Any Other Name

Monday, December 12, 2016

Today's Spotlight Market: The European Central Bank extended their program of quantitative easing until the end of 2017. Although the ECB will be reducing bond purchases to 60 billion Euros per month from 80 billion Euros per month, ECB president Mario Draghi was adamant that this was not a taper. Mr. Draghi stated that since ECB was willing to increase bond purchases if economic conditions warrant, the planned reduction in bond purchases did not constitute a taper.


Fundamentals

Economic conditions in the Eurozone remain weak, but there are signs of slow improvement. The Eurozone economy is projected to grow by 1.7% for 2016 and 2017. The ECB's target rate of inflation is 2.0%, and inflation is slowly expected to increase to 1.7% by 2019. Eurozone unemployment has finally fallen below 10%. However, there is still political risk with the recent resignation of Italian Prime Minister Matteo Renzi after a recent constitutional referendum championed by Mr. Renzi was resoundingly defeated last week. The former Italian Foreign Minister Paolo Gentiloni has been asked by President Sergio Mattarella to attempt to form a government. It will take several days to see if Mr. Gentiloni is successful in forming a government. In addition, there remains a risk of a state bailout of Italy's third largest bank, Banca Monte dei Paschi di Siena. The bank is attempting to raise 5 billion Euros in the next 19 days with a debt to equity swap.

Technical Notes

Turning to the 3-month continuation chart, we see mostly bearish technical signs for the Euro as it continues to be close to parity with the US Dollar. The 50-day simple moving average (SMA) is below the 200-day SMA, and the even shorter-term 20-day SMA is below the 50-day SMA. The 20-day SMA seems to be serving as a resistance level as well. The 1.05000 level seems to be support and, if that is broken, the next level of support may be the psychologically important 1.00000 level. 14-day relative strength index is a mildly bearish 41.41.

Dale Jennings, Commodity Analyst

December 14, 2016

So Now What?

Wednesday, December 14, 2016

Today's Spotlight Market

As of this writing, the December 2016 Fed Funds futures contract is pricing in a 95.4% probability of the Fed raising interest rates by 25 basis points following today's FOMC meeting. Looking out to 2017, we have to go all the way out to the June 2017 contract to see traders bring the odds to over 50% for another rate hike.


Fundamentals

With market participants all but certain that the Fed will announce a 25 basis point increase in the benchmark Fed funds rate at the conclusion of today's Federal Open Market Committee (FOMC) meeting, the question that remains is what guidance will the Fed provide for interest rates in 2017. Here is where we see some differences in opinion, with some traders initially selling the long end of the yield curve following the recent U.S. Presidential election as thoughts that an increase in government spending on infrastructure projects and the likely probability that Congress will enact policies that would encourage economic growth have brought the idea to the forefront that inflationary pressures may rise, which would favor the prospects of a rising interest rate environment. On the other side of the debate, some traders believe the recent sell-off in U.S. Treasuries was overdone and the short bond trade is starting to get crowded. Should Fed officials make comments that are interpreted as "dovish" towards further rate hikes in 2017, we may start to see market participants begin to pare-back their rate expectations, which may ultimately lead to a potentially significant short-covering rally in longer-dated Treasury Bonds. One potential offshoot of a short-covering rally would be a flattening on the yield curve. The so-called 2yr/10yr curve has steepened by 8 basis points alone the past month, after having actually flattened by 1 basis point for most of 2016, so there is plenty of room for the curve to correct back to where it stood prior to the past month.

Technical Notes

Looking at the daily continuation chart for Treasury Bond futures, we notice the market is trading just off its 2016 lows, and a change in market sentiment following the U.S. elections has seen many investors shift their positions by liquidating Bond holdings and moving into equities. Prices are now well below both the 20- and 200-day moving averages, with the 20-day average crossing below the 200-day average, which is generally viewed as a bearish technical signal, back in mid-October. The 14-day RSI remains in oversold territory but is off its recent lows, with a current reading of 26.61. Monday's low of 147-10 looks to be support for the March futures, with resistance seen at 155-16.

Mike Zarembski, Senior Commodity Analyst


December 15, 2016

FOMC Deals a Blow to Gold Traders

Thursday, December 15, 2016

Today's Spotlight Market

Gold futures reached new multi-month lows last week, as traders braced for yesterday's FOMC meeting. As expected, the bank raised its target interest rate and released a relatively hawkish statement, hinting at further rate hikes in 2017. This further bolstered the US Dollar and created a difficult environment for Gold investors, who were already swimming against the current.

Fundamentals

Gold supply and demand fundamentals have been shaky to say the least, with physical demand remaining soft, according to the World Gold Council. India and China, two of the largest Gold markets, have had weak demand, exacerbated by government action. In India, the government demonetized 500 and 1,000 rupee notes to fight corruption. While India citizens wait to exchange the notes for new currency, many find themselves feeling a cash crunch. In China, the People's Bank of China has limited imports of the metal, according to Chinese traders. The US Dollar Index has broken through resistance and looks as though it could extend gains, which has put pressure on Gold prices. The currency was losing momentum going into the US election last month, but the incoming administration breathed new life into the greenback due to what investors view as Dollar friendly policies. The collapse in treasury prices and, conversely, the rise in interest rate outlook has diminished Gold's value as an inflation hedge. The ECB's non-taper taper last week could also be seen as negative for metals. In the near-term, the ECB added liquidity to the market, but it was very evident that the central bank would like to phase out the bond buying program. This resulted in the yield curve for European treasuries steepening, indicating traders expect the bank to be a bit more hawkish as 2017 progresses.

Technical Notes

Turning to the chart, we see the February Gold contract continuing to fall after breaking through several key support areas. While the market has been in freefall since mid-November, the angle of the decline is gradually becoming less steep, suggesting prices could be set to consolidate or possibly hunting for a near-term bottom. The RSI indicator is showing some divergence from prices, suggesting prices may reverse or stabilize.

Rob Kurzatkowski, Senior Commodity Analyst


December 16, 2016

Oil Prices Not Immune to Fed Rate Hike

Friday, December 16, 2016

Today's Spotlight Market

The fundamentals for Oil prices still appear moderately bullish, especially following the larger than anticipated draw from inventories last week. In its weekly energy inventories report, the Energy Information Administration reported that U.S. Crude Oil inventories fell by 2.563 million barrels last week. This was about 800,000 barrels more than traders were expecting. Gasoline inventories were higher last week, with just less than 500,000 barrels added to storage. However, analysts were expecting a nearly 1.8 million barrel increase, so this number was also deemed as being bullish for Gasoline futures.

Fundamentals

The announcement of a 25-basis point increase in interest rates by the Federal Reserve came as little surprise to traders who were anticipating a year end rate hike. However, the testimony by Fed Chair Janet Yellen was a bit more hawkish than expected, with traders now anticipating as many a 3 rate hikes in 2017, as it appears that the outlook for stronger U.S. economic growth and increasing inflation pressures will support higher rates in 2017. The market participants reacted by sending the U.S. Dollar to its highest level in 14-years, while Dollar-based commodities such as Gold and Crude Oil saw prices retreat. Oil Prices have been in an uptrend for most of 2016, and prices recently traded at their highest levels since the summer of 2015 following the announcement from OPEC of an agreement to cut production. However, the stronger Dollar makes commodities that trade in Dollars more expensive for non-Dollar users, which could work towards weakening global demand for commodities including for Oil outside of the U.S. where economic growth has stagnated.

Technical Notes

Looking at the daily chart for February Crude Oil, we note the market is in a mild price correction after a move to nearly 18-month highs. We are seeing prices attempting a test of the 20-day moving average, and so far they have been able to hold just above this widely watched technical indicator. The 14-day RSI has started to turn lower and is now at a more neutral level of 56.82. This past Monday's high of 55.44 remains the next major resistance level for the February futures, with support seen at the December 1 low of 49.94.

Mike Zarembski, Senior Commodity Analyst

December 19, 2016

A Pounding Review for 2016

Monday, December 19, 2016

Today's Spotlight Market

Today's Spotlight Market: It's been a remarkable political and economic year in the United Kingdom. In 2016, Prime Minister David Cameron resigned to be replaced by Theresa May, Sadiq Khan replaced Boris Johnson as Mayor of London, Philip Hammond replaced George Osborne as Chancellor of the Exchequer, and the Labour Party experienced mass resignations in the Shadow Cabinet in addition to a leadership challenge after just one year under Jeremy Corbyn. The Bank of England cut interest rates for the first time since 2009, reducing rates from 0.50% to a record low 0.25%.

Fundamentals

Of course, the biggest event in the United Kingdom was the surprising vote to leave the European Union in June. For the past six months, uncertainty has plagued the British Pound after the initial plunge when the results of the referendum became clear. Theresa May's government has provided few details as to the path they wish to take with the EU negotiations, but they have announced that they intend to begin the process of leaving by triggering article 50 by the end of March 2017. Entering 2017, Prime Minister Theresa May faces several challenges, mostly related to Brexit. The third largest party in the UK Parliament, the Scottish National Party, has taken a hard stand against leaving the European Union. Scottish First Minister Nicola Sturgeon is set to announce that Scotland will hold a second referendum on Scottish independence unless Scotland can remain in the European Single Market. In addition, a series of strikes in the days approaching Christmas will affect the postal service, airlines, and trains. Finally, after losing a recent by-election, Mrs. May holds a very narrow majority in the House of Commons, leaving little room for a cushion in any controversial votes.

Technical Notes

Turning to the year-to-date continuation chart of the British Pound for 2016, we see the bearish pattern which developed in June continuing. Recent trading has been in a narrow range between the 20-day and 50-day simple moving averages. The 20-day SMA has recently crossed back above the 50-day SMA and it now seems to provide support while the 50-day SMA seems to provide resistance. Still, trading remains under the longer-term resistance level of 1.5000 pre-referendum. 14-day RSI is a neutral to slightly bearish 43.17.

Dale Jennings, Commodity Analyst


December 20, 2016

Geopolitical Risks Drive Oil

Tuesday, December 20, 2016

Today's Spotlight Market

Crude Oil futures finished higher on the day after several events overseas stoked geopolitical fears. A Russian envoy to Turkey was assassinated at an art gallery by an off-duty Turkish police officer disgruntled over Russia's intervention in Syria. Traders will closely be watching the Russian reaction to the assassination of a diplomat. Russian and Turkey have been on opposite sides of the Syrian civil war and both nations helped broker the ceasefire in Aleppo. There is concern that the ceasefire could fall apart in Aleppo, but what may be even more troubling is the fact that Russian forces and Turkish troops are conducting separate operations not far from one another in northern Syria. Any sort of engagement between troops could drive up the risk premium in Oil. In Berlin, a truck driver crashed into a Christmas market intentionally, killing at least 9 people and injuring dozens more. This attacked was viewed by investigators as deliberate and ISIS later claimed responsibility for the attack.

Fundamentals

While geopolitical events and OPEC's production cut have supported Oil prices recently, there is some concern that US production will ramp up to fill the production cut from OPEC. On Friday, Baker Hughes had reported that the number of active US Oil rigs had climbed by 12 to 510 operational rigs. This is the highest total for the US since January. The Canadian rig count had also increased by 4 to 234 operational rigs. Many traders view this most recent rally in Crude Oil prices as driven by speculative financial investors, who have been extremely upbeat about the global economy. The market could be seen as vulnerable to a correction if OPEC members do not adhere to their stated production cuts.

Technical Notes
Turning to the chart, we see the February Crude Oil contract trading below minor resistance around the 53.50 level. If the market fails to break through 53.50, we could see Oil lose its upward momentum. On the downside, failure to hold 50.00 could trigger further selling into the mid-40's. The RSI indicator is showing overbought levels for Crude Oil, suggesting prices could stall or fall back.

Rob Kurzatkowski, Senior Commodity Analyst


December 21, 2016

Are Cotton Price in Store for a Hard Landing

Wednesday, December 21, 2016

Today's Spotlight Market

Speculative accounts and especially large commodity funds are currently heavily net-long Cotton futures according to the most recent Commitment of Traders report. For the reporting period ending December 13, non-commercial traders were holding a whopping 117,826 net-long positions having added another 668 long positions during the week. Even the small speculators were bullish last week adding 940 new net-long positions to bring the non-re-portable position to a net-long 11,194 contracts. That leaves the commercial traders to sell to the specs increasing their net-short position by 1,609 contracts to 129,021.

Fundamentals

The Cotton futures market has been quietly bullish since the end of February as surprisingly strong U.S. Cotton exports have helped to support prices. However, as we look towards the beginning of 2017, there appear to be some potentially significant headwinds that may stymie any further rally attempts. First we have the rising value of the U.S. Dollar which makes commodities that trade in Dollars more expensive for non-Dollar users. This could affect U.S. Cotton sales as more marginal buyers may hold off of purchases until prices become cheaper. In addition, Chinese Cotton imports have stalled as domestic mills have ample supplies of Cotton available as government controlled inventories are being released. In fact, Chinese Cotton imports are down over 40% from last year. It now appears that China will no longer be the world's leading importer of Cotton with the title moving to Bangladesh where many mills have moved their business due to lower labor costs. With speculators already heavily long Cotton futures, the market may need to see a price correction in the near-term to shake out the weak longs in the market and provide a base for prices.

Technical Notes

Looking at the daily chart for March Cotton futures, we notice prices trading at 1 month lows as of this writing, as the recent upward momentum appears to have run its course. Prices have fallen below the 20-day moving average, which gives the advantage to short-term Cotton bears. Momentum as measured by the 14-day RSI has turned weak with a current reading of 39.25. There appear to be some good chart support between 66.80 and 67.00 which also happens to be where the 200-day moving average is currently holding court. Resistance is found near the recent high of 72.75 and should this level give way, we see the next major resistance area just below 75.00.

Mike Zarembski, Senior Commodity Analyst


December 23, 2016

Natural Gas Traders "Buy the Rumor and Sell the Fact"

Friday, December 23, 2016

Today's Spotlight Market

The so called "widow maker" spread of March vs. April Natural Gas has mimicked the lead month futures the past several months but could start to see in increase in price volatility as we head into winter. This calendar spread is notorious for potentially large price moves as it involves the transition from winter into spring and the traditional end of the winter Gas draw from storage and into the start of the spring Gas storage build. Forecasts calling for below average temperatures could favor the March contract gaining on the April futures on the belief that storage draws will increase going into spring. However, should we see winter temperatures range above average, then the potential for the spread to weaken or even move into a "contango" where the April contract is trading above the March Contract is possible, especially if Gas storage levels are holding above the 5-year average.

Fundamentals

Now that winter has "officially" arrived in the Northern Hemisphere, Traders in Natural Gas futures will be paying closer attention to the mid-range weather forecasts to weigh the prospects of Arctic Cold moving through North America in the coming weeks. Market participants got a taste of below normal temperatures the past week as record cold readings were seen in many parts of the Northern Plains and Western Great Lakes states. This late fall chill helped trigger a larger than expected draw in Gas from storage last week with the Energy Information Administration (EIA) reporting that 209 billion cubic feet (bcf) of Gas was removed from storage. This was well above the average trade estimate of a 200 bcf draw. While current inventories are about 5.9% below levels this time last year, we are still 2.2% above the 5-year average. Market reaction was rather muted following the release of the EIA Gas Storage report, as prices had already rallied sharply on Wednesday due to short-covering buying as well as reports that some long-range forecasts were calling for a potential return of below normal temperatures in mid-January. However, with temperatures hovering near 40 degrees here in Chicago today and the more reliable 6 to 10 day forecast calling for above normal temperatures for the eastern half of the U.S. as we head into the New Year, Natural Gas bulls were liquidating long positions on Thursday as traders close out position ahead of the long Christmas holiday weekend.

Technical Notes

Looking at the daily chart for February Natural Gas, we notice what may be a "bull flag" technical formation being formed with prices currently trading just below the upper trend line of the "flag". We notice trading volume has declined from recent levels during the formation of the pattern which is typical for this indicator, we would need to see prices trade above the upper trend-line preferable on above average trading volume in order to confirm the bull flag formation. Prices remain above both the 20 and 200-day moving averages and the 14-day RSI has weakened from recent highs but remains relatively strong with a current reading of 58.65. Support is found at this past Tuesday's low of 3.242, with resistance seen at Thursday's high of 3.645.

Mike Zarembski, Senior Commodity Analyst