ENERGIES | METALS
By Kevin Davitt
What a week.
Volatility is back.
The Yen is trading like a highly levered penny stock.
Crude oil traded toward the high end of the range this morning with a July print of $98.25. In early February, when a number of commodities made tops - July Crude traded $99.77. Gasoline is also at the high end of recent range, but well off the Feb levels. Watch RBOB because pops at the pump act like a tax and in Chicago we could see the 87 octane north of $5.00/gallon before long.
With a couple hours to go before we put this week in the books, here's how things look:
Cotton, Rice, and the Yen leading the charge. I've spilled considerable electronic ink documenting the pile into and out of the Yen/Nikkei trade over the past few months. Suffice it to say that when too many people put on a position because 'the Yen HAS to go lower"....many of the late adopters find out how quickly you can be wrong. They are typically expensive lessons.
The Yen is back up at high end of recent range as the carry trade unwound viciously this week. Aggressive types could again consider leaning into the short side of this trade in my estimation:
Here's a 3 week look at the 30 year bond futures. Implied vols exploded in the Bond complex about a month ago, and apparently it was justified. We'll get some idea of how real the taper threat is next week when the FOMC announces their decision and Bernanke has a presser on Weds. Careful!
Interestingly, the Fed's favorite mouthpiece, Jon Hilsenrath and the IMF have chimed in over the past 24 hours. I sent the WSJ online Blog article yesterday. Below is what the IMF has to say about the Taper debate.
So the IMF has weighed into the only debate in town.
In its latest assessment of the US economy, the IMF argues that the Federal Reserve should persist with its stimulus programme at least until the end of the year.
According to the IMF:
Under IMF's staff's growth projections a continuation of large-scale purchases through at least end-2013 is warranted.
The call came as the report attacked US fiscal tightening as "excessively rapid", but gave a broadly upbeat assessment of the outlook for the US economy over the next five years.
The US economic growth will slow to 1.9 per cent this year from 2.2 per cent last year. But economists at the IMF then expect it to accelerate to 2.7 per cent in 2014 and 3.5 per cent the year after.
The unemployment rate will drop to 7.2 per cent next year from 7.5 percent this year. It will then fall to 6.8 per cent in 2015 and 6.2 per cent in 2016.
Inflation will remain muted, coming in at 1.8 per cent this year and in 2014. From 2015, it will gradually climb and reach 2.3 per cent in 2018.
The Aussie Dollar and Silver are both poised to have their first up weeks since what seems like the Clinton administration (a little hyperbole there). Perhaps they based.....as usual, time will tell.
Be aware that Emerging Market Indices have suffered mightily of late. The darlings of the 2010-2011 period have been under relentless pressure in the past few months as global growth prospects are called into question again.
The Chinese liquidity/short term funding/SHIBOR issue that I addressed yesterday will be interesting to keep an eye on in the coming week.
What else is interesting?
- Coffee traded to levels last seen in August of 2009
- Lumber gave up much of last week's gains, but has held old lows.
- The Aussie Dollar tested multi year lows and MAY HAVE held.
- The front month Hogs went borderline parabolic in the last month. Up 13% into expiration
- Rice futures also ripped higher this week (along with Oats, but Oats rolled over today)
Next week has a variety of key events (CPI, FOMC + Press Conference, Philly Fed, and Quarterly Expiration) which you can see here: (Note Index futures options will expire on an opening print because of Quarterly cycle. Also, futures liquidity will continue to move out to September).
Here's the last 3 months in the Nikkei (the BoJ announced their intent to double the monetary base in early April). Guys that have been short gamma for any stretch of time are likely hanging the Going Out of Business sign. I believe chartists in Japan call this the Mount Fuji formation. Explosive..... either way, it's going to be an interesting test of the resolve of Quantitative Easers everywhere. I imagine there are some limits to monetary policy. Have the Japanese found them?
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