Bonds: Bonds rallied toward early-September highs on Merrill Lynch’s subprime write-downs and a home sales report that showed the housing market reeling. The Merrill news sent stocks lower on the open after the company reported a staggering write-down of $7.9 billion, with just under $21 billion of mortgage-based debt outstanding. Existing home sales dropped an eye-popping 8 percent, almost double consensus estimates. Certain key higher-priced real estate areas – namely the Northeast and Southern California – were hit especially hard due to the inability of purchasers to get approval for jumbo loans. Fed Governor Kroszner, speaking before the House Financial Services Committee, stated that mortgage reform should not hurt the mortgage securitization sector. This is setting up an investor versus homeowner showdown in which neither side, or the overall economy, will benefit. Laws enacted to protect consumers would, in all likelihood, lead to a devaluation in mortgage-backed debt resulting in further write-offs of bad debts and, ultimately, more difficulty for homeowners seeking financing. On the other hand, leaving borrowers without a safety net could cause more damage over the long haul, given the fact that the number of loans resetting will not peak until the second quarter of next year, at which time a record number of foreclosures is possible. Government debt could act as a safe haven for investors, provided inflation remains low. The market came close to its September 10th highs, but traders were reluctant to push prices higher ahead of the FOMC policy meeting next week. Fed Fund futures have priced in a 100 percent chance of a rate cut, leaning toward a quarter point. Technically, December Bonds look bullish on the daily chart, but the market is very overbought at the moment. The overbought conditions and Fed uncertainty may be setting the stage for some consolidation or possibly a small retreat. Last week’s breakout from a descending triangle is measuring a move to 116-00. Momentum remains strong, coming in at +3-06. Support can now be found at 113-00 and 112-10, while resistance comes in at 114-08.
Crude Oil: Petroleum traders got a shot in the arm today from the weekly inventory numbers. Crude Oil imports slowed by over a million barrels a day over the last week, and ending stocks were down over 5 million barrels versus estimates of a million barrel rise. Distillates also surprised, as Gasoline inventories fell by almost 2 million barrels versus estimates of a 1 million barrel rise, and Heating Oil and Diesel showed a draw of 1.85 million barrels. Turkey was said to have hit Kurdish targets along the Iraqi border, pushing the market higher prior to the EIA and DOE releases. Fundamentally, Crude is trading well above where supply and demand would dictate, and the recent Turkish crisis has combined with commodity and hedge funds putting fresh money into the market to push prices toward the $90 mark. For now, any new developments – positive or negative – in regard to the Iranian nuclear program and/or Turkey-Kurd crisis could affect prices violently. December Crude made new intraday highs overnight, reaching 88.99. Momentum showed some bullish divergence from the RSI and price over the past three days, suggesting upside technical bias. December Crude is at overbought levels, which could hamper rallies. Support comes in at 84.85 and 82.50, while resistance may be found at 90.00.
Copper: Copper suffered another day of losses yesterday on the poor global economic outlook. The disappointing housing data kept prices from rallying with the rest of the precious metals market. Copper has followed Crude Oil and Gold higher this morning, as the U.S. Dollar continues to flounder and equities recover. China did increase its own output of the base metal by 24 percent on the year and all is quiet on the labor front, which could hold back price advances. After confirming a double top, the market has broken down, but has yet to reach the measured move of 20 cents from the breakout. Momentum continues to lag behind both price and RSI, suggesting that more downside may lie ahead. Support comes in at 341.00 and 339.00, while resistance can be found at 357.50 and 361.50.
Rob Kurzatkowski, Commodity Analyst