Weekly Market Outlook: August 11th – August 15th

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Includes: DBC, FXB, FXE, FXS, FXY, GSG, RJA, UDN, UUP
by: Matthew Bradbard

There are conflicting opinions about whether the Bull Run in commodities is over or not. We view the recent pullback as a correction in prices. The bubble bursting argument just doesn’t make any sense being that a variety of commodities are still showing sizeable gains ytd. Some commodities may have over extended their move to the upside and now may come back to a more realistic value, but with more mouths to feed, consumption for raw materials (from base metals to energy) in emerging markets increasing, we view the idea of the bull market coming to a end as ridiculous.

Even though there is no doubt that global consumption is slowing down at the moment, the longer-term trajectory for consumption is higher. We cannot dispute that prices have come down and in the short run will most likely come down more, but as opposed to running away from a market where prices are governed by supply and demand, we advise investors to actually do some homework and quantify the supply and demand and then tell me commodities are not in a multi-decade bull market.

I am not implying prices will go up in a straight line, however we will continue to advise clients to buy dips. Restricted supply and more demand should lift the prices of commodities in the long term. Furthermore, along the way opportunities will present themselves to go short or bet on price depreciation; the same amount of money can be made or lost, it is simply figuring out the right direction.

Currencies

Last week the ECB left rates unchanged at 4.25% and ECB President Trichet stressed keeping inflation under control as it is higher than current benchmarks. His hawkish stance lost its edge after he acknowledged that second half growth will slow and he has no bias or pre-commitment to future rate hikes. Further comments were interpreted as more dovish as the Euro fell hard last week trading at a 5 ½ month low against the dollar loosing 546 ticks on the week. The path of least resistance remains down but we have reached our objective on shorts and expect to see a bounce in the short term. If you took our recommendation from three weeks ago (see weekly commentary from7/14-7/18) purchasing the September 150 put at $450, it closed on Friday at $2362.50 and we would recommend liquidating 90% of your position and hold the remainder.

Further problems or weakness in the stock market could see safe haven buying in the metals which could help curb losses in the Loonie as it tends to look for guidance from metals. If energies were to slow their precipitous decline that would also be supportive. As we said last week on a break of .9700 look out below. Although we did not anticipate the extent of weakness we saw last week, the weakness commodity wide hit the commodity currencies particularly hard. We are not recommending a long yet, but the daily and weekly charts are starting to look more accommodative. Support comes in at .9300 with resistance at .9550.

An unexpected surge in the number of full-time employees last month is unlikely to stand in the way of an interest rate cut in Australia. Economists doubt this will deter the Reserve Bank of Australia from cutting rates possibly as early as next month. The Australian dollar gave up 405 ticks last week loosing 4.4% trading to its lowest level since mid March. We are on the sidelines with clients, but will be looking for a long entry for them on signs of a bottom here or interim top in the dollar as we think both of these trades got ahead of themselves last week.

Japan painted a darker picture of its economic health last Thursday, warning of deteriorating exports, lower output and slowing corporate profits signaling a point towards contraction in the world's second largest economy. We have seen a little better than a 50% retracement as of last week dating back to the lows in 2007, with prices oversold on the daily chart and not believing the stock market has much left we are exploring the long side of the September yen. Support comes in at Monday’s low at .9076 with resistance at .9250 followed by .9400. We were stopped on our long probes last week at a slight loss for clients and will look to get it back on our next long entry. Enter lightly and look to add when the markets proves you right.

As we said last week we are on the sidelines in the Swiss franc with a bullish bias. Well our bias was wrong, but the sideline choice was rewarded as we did not get caught in the most recent downdraft. Last week if you were long any currency but the dollar, you would have been wrong. Last week the September Swissie lost 264 ticks trading down to .9255 levels not seen since February. Prices should find support this week just below .9200 if traders want to explore the long side with a tight stop. Resistance doesn’t come in until .9420.

Last week the BOE left rates unchanged at 5.0%, but this may not be the trend moving forward as weakness spreads throughout their economy. The September contract gave up 552 ticks and made its way to a new contract low. We continue to prefer the short side, but would caution new entries to establish shorts as prices may bounce from oversold levels. We could see a bounce up to short term moving average at approximately 1.9480 and will explore selling rallies if that happens.

As long as lower oil prices continue to aid equity prices, the dollar should be well supported against most other major foreign currency markets. Further strain on the financial sector could see some money taken off the table on recent entries for dollar bulls that experienced its best one day performance in 6 years last Friday. We certainly did not see last week’s strong advance coming and do not believe that it will continue. Although we will not get in front of this dollar advance we feel that it will set up a good short entry as the most recent parabolic move is not justified. The argument is that although things are bad domestically circumstances are worse abroad, but to me that is a weak argument. We have seen a 6.0% advance in the last month and we should see the buying pace slow in coming sessions to weeks. Next resistance is at 77.00 on September with support at 75.70 followed by 75.00

Softs

Buyers have been re-entering sugar on word of strong cane-ethanol demand from Brazil and the nation’s crop may be a little smaller than expected. Additionally, sugar production in India, the world's second-biggest producer, fell 6.0% in the 10 months to July after farmers in the biggest cane-growing states delayed crushing. Production next year may drop 25.0% to 20 million tons as some cane-growers switched to more profitable crops such as rice, corn and oilseeds. Supplies are projected to be down in the top two producing nations and demand is expected to increase is the central argument we will be recommending longs in sugar for the next few years. This is not an exciting trade with movement like oil, but if you look at where sugar prices have been and where they currently are we see sugar as a value play and extremely under valued at current prices. We continue to accumulate March futures and options for customers. March should be supported between 13.80 and 14.00 with resistance at 15.50.

Cocoa prices fell in the last few weeks as dollar strength generally leads to lower cocoa prices.  September cocoa came off $317 before finding support at the 61.8% Fibonacci retracement level at last week’s low. We are not convinced the selling is done and are recommending watching from the sidelines until we get a clearer picture. If we were to see prices rally we should see resistance at 2800.

September coffee was largely range bound last week as prices backed off 4 cents making their way back to the bottom of the recent range. We have seen successive higher lows on the monthly chart so on the longer term we do expect to see prices in coffee trade higher, but looking at a shorter time frame things could go either way and we are not confident in having any exposure long or short. Support on September comes in just below 134.00 with resistance at 140.00.

World cotton stocks are expected tighter in 08-09 amid decreases in production and lower mill use according to the International Cotton Advisory Committee. Global cotton stocks are forecast to be substantially tighter at 10.7 million tons in 08-09 from 12.10 million the year before. This in combination with demand expectations has caused the ICAC to increase its outlook for cotton prices 10 cents higher for next year. With current pricing below 70 cents and a price projection of 83 cents we will continue to advise clients to be long. We are using the most recent setback to get long futures in addition to add bullish option plays for clients. We are looking for last week’s low of 68.20 on December to hold and would like to see by the week’s end prices back over 72 cents.

Orange juice seems to be finding moderate support just above $1 on November, but until there is a reason to buy or we get confirmation technically that a bottom is in place, we are not interested in buying for clients. The seasonal tendency from now out until November is for a trend higher, however we would like to see some bullish news from the USDA or perhaps a hurricane that may cause speculators to get long.  We are not in a rush to pick a bottom because if the liquidation in commodities continue, there are not a lot of bullish fundamentals currently that would cause FCOJ prices to move up. Last week’s low of 99.65 serves as support with resistance at 112.00.

Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial. Before trading MB Wealth recommends that you should carefully consider your financial position to determine if commodity trading is appropriate for you. All funds committed should be purely risk capital. Past performance is no guarantee of future trading results. There are no guarantees of market outcome stated, everything stated above are our opinions. Calculations of profit and loss have not factored in commissions and fees.