Commodities Today: Oil Falls, But Precious Metals And Treasuries Rise As Traders Seek Shelter

by: Matthew Smith


China's PBOC shocked the global markets by allowing its currency to deflate by nearly 2% on the session.

Traders now are rethinking their strategies ahead of the Fed's meeting because China is a huge wild card.

TEX is merging with Finland's Konecranes to create a $10 billion heavy machinery manufacturer.

After the poor economic numbers over the weekend, there were rumors and speculation that China would do something to provide a spark for its economy, including the possibility of announcing a bold stimulus plan that would boost the entire economy. Instead, China wimped out and decided to devalue its currency and rather than being bold about it, it hid behind a weak excuse of a change in how it calculates the midpoint from the daily price action. Following the announcement, China's currency fell nearly 2% against the US dollar and also began to weaken against its regional rivals whose currencies have been weakening over the past year or so against the greenback.

While the cheaper currency is seen as a possible solution for China's exporters, there was a lot of fallout for everyone else as oil prices fell and currency swings began to be felt by China's neighbors in Asia and Australia. We doubt that this turns into a currency war because China wants to prove that it can have a stable currency in both good times and bad and honestly, now that the IMF has finished its business it certainly seems like a case of "no harm, no foul".

Chart of the Day

Both gold and US Treasuries are higher today as a flight to safety takes place. Although this 1-month chart does a very poor job of showing it, the US 2-Year Treasury is back below 0.70% and threatening to break below the 0.68% level which has been key as of late.

Source: CNBC

Commodity prices are as follows (at time of submission):

  • Gold: $1,094.80/ounce, up by $0.70/ounce
  • Silver: $14.85/ounce, up by $0.029/ounce
  • Oil: $44.06/barrel, up by $0.19/barrel
  • RBOB Gas: $1.6438/gallon, up by $0.0208/gallon
  • Natural Gas: $2.841/MMbtu, up by $0.043/MMbtu
  • Copper: $2.3405/pound, up by $0.008/pound
  • Platinum: $970.80/ounce, up by $8.60/ounce

Commodities Are Finding Strength This Morning

With China's PBOC having not only called into question the value of the country's currency, but also forced everyone to reevaluate everything it thought it knew about the economy previously, which in turn is forcing everyone to rethink what they thought they had figured out already in regards to what the Federal Reserve was planning to do. Weakness in China was one of the few wild cards that everyone could agree on this past month, and with that card now in play, investors and traders are trying to figure out just how weak the China's economy really is as everyone scrambles to get back to neutral on their interest rate bets.

With gold and silver prices where they are and the weakness we are seeing this morning, we would expect to see heavy volume in the SPDR Gold Trust ETF (NYSEARCA:GLD) and the iShares Silver Trust ETF (NYSEARCA:SLV) today, and we think that traders who have been short gold and/or Treasuries will be forced to cover some, if not all, of those positions today.

Heavy Equipment Merger

After losing out on United Technologies' (NYSE:UTX) Sikorsky unit to Lockheed Martin (NYSE:LMT) this past month, Terex (NYSE:TEX) has shifted its focus overseas and announced a merger with Finland's Konecranes (OTCPK:KNCRY). The merger will create a company with $10 billion in revenues per year and will be 60% owned by Terex's shareholders.

We have seen heavy equipment manufacturers merging since before the top in commodity prices as everyone tries to add scale, cut costs and maintain market share. Some transactions have been poorly timed, such as a couple that Caterpillar (NYSE:CAT) tried to pull off which both failed. This acquisition looks a lot better as it will help to further diversify Terex's business and allow it to benefit from a general economic recovery even if mining equipment or China's construction demand does not take off in the coming year or two. The added exposure to the industrial sector will help Terex, and shareholders seem to agree with us as shares are up by more than 20%.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.