Browsing Category: "Commodity"
The coming summer should be exciting for traders! While summer trading generally tends to be slow, this one could be different. A large number of other professional traders I talk with are all feeling the tension building in the market. We all think some big movements are just around the corner and the big question is which way are things going to move? Depending on your trading style you may be viewing the recent market action as the beginning stages of a bear market (major sell off). A bear market is not necessarily impossible as the U.S. Economy is showing the beginning signs of weakness. The fact that stocks have moved lower for almost 6 weeks straight is a recent reminder that we may not be out of the woods just yet. The recent price action and negative sentiment has been harsh enough to make 99% of traders bearish. In contrast, some traders may be seeing this market as an oversold dip preparing for a bounce/rally in the bull market which we have been in since 2009. Some traders may see this as a buying opportunity because you are a contrarian. Most contrarians generally want to do the opposite of the masses (herd) who are merely trading purely out of emotional sentiment. I myself have mixed thoughts on the market at this point in time. I’m not a big picture (long trend forecasting) kind of guy but my trading partner David Banister is great at it. Rather I am a shorter term trader catching extreme sentiment shifts in the market with trades lasting 3-60 days in length. So looking forward 2-5 days I feel as though stocks and commodities are going to bottom and start to head higher for a 2-6% bounce. At that point we need to regroup and analyze how the market got there… Was the buying coming from the herd, institutions, or was it just a short covering rally? Additionally, where are the key resistance levels and did we break through any? During extreme sentiment shifts in the market we tend to see investments fall out of sync with each other for a few days. I feel the attention will be on stocks and we get a bounce this week. I am expecting commodities to trade relatively flat during the same time period. OK let’s take a quick look at the charts… Dollar Index 4 Hour Candles Crude Oil Chart – Daily Silver 4 Hour Chart Gold 4 Hour Chart
I feel as though the US Dollar is trying to bottom. It is very possible that we test the May low at which point I would expect another strong bounce and possible multi-month rally. So if the dollar drops to the May lows then we should see higher stocks and commodities, but once the dollar firms up and heads higher it will be game over for risk assets.
Oil took a swan dive in early May and has yet to show any signs of moving higher. Actually crude oil is looking more and more bearish as time goes by.
Silver has formed much of the same pattern that oil has. On a technical basis its pointing to sharply lower prices still. The fact that silver bullion went from an investment to a speculative trading instrument within the past 8 months makes me think it could test the $ 25 area. The one thing to remember here is that silver is still overall in a bull market. This is a 50/50 guess in my opinion as it nears the apex of this pennant pattern.
Gold has held up much better than other metals and commodities and I feel that is because it’s still seen at the REAL safe haven. But reviewing the chart Im starting to see bearish price action beginning to take place.
The commodity bull has shown little sign of running out of steam – until now. Prices began to stumble as soon as a note from Goldman Sachs, the American banking giant, whizzed around trading desks across the globe last week. The broker advised clients to close its profitable “CCCP” play, which involved investing in a basket of crude oil, copper, cotton, platinum and soybeans. The commodities team, led by Jeffrey Currie, argued that after gaining 25pc since December, the risks to the trade had changed. “Although we believe that on a 12-month horizon the CCCP basket still has upside potential, in the near term risk-reward no longer favours holding these assets and we are recommending closing the position,” Goldman said. Commodities traders read this as the investment bank calling time on commodities for the time being. Goldman said that even though it was closing copper and platinum trades, “the structural supply-side story remains intact, and we would look for new entry points” – or, in other words, buy again if the price falls. Tens of thousands of investors have piled into commodities in recent years, spurred on by stupendous returns – funds such as JPMorgan Natural Resources and BlackRock Gold & General have proved popular. However, the move by Goldman Sachs raises the question: is now the time to take profits?
There has always been an investment case for holding commodities – recent research from JPMorgan found that they were a hedge against rising inflation and improved returns while reducing volatility. Commodities outperformed equities and bonds by 10pc when economies were in a late expansion phase, and marginally outperformed when economies were in the early expansion phase just after a recession, JPMorgan said. The only time they lagged other assets was towards the end of a recession. Commodities are still volatile beasts – just ask investors who piled into oil stocks as crude marched towards $ 147 a barrel in 2008, only to come down with a jolt as the price plummeted to $ 60 – and then rose again to today’s $ 125 a barrel. Neil Gregson, the co-manager of JPM Natural Resources, was unconcerned about the Goldman note because, he said, it did not affect the long-term rationale for commodities, suggesting that private investors ignore the sell signal too. “Goldman’s is short-term trading call,” he said. Mr Gregson added that commodities were driven by supply and demand – and that a lack of supply would continue to support prices. “The market is pricing in that commodity prices have peaked, and that’s why many shares are cheap. We also don’t think that prices will fall.” Fidelity was also banging the commodity drum not so long ago, but it is unfazed by the Goldman move. Its portfolio models continue to indicate that, with inflation remaining high and economic growth also recovering in the developed world, commodities will tend to do well. Ayesha Akbar, a portfolio manager at Fidelity, said: “Since we first suggested that investors might want to consider commodities for their portfolio, they have done well. I believe the case for their inclusion in a portfolio remains valid.” She added: “Oil prices are factoring in a risk premium on geopolitical concerns and, at the moment, this does not show much sign of abating. But commodities are about much more than oil – agriculture also features and many items such as soybeans have lagged and may be due a rebound.” One of the key drivers of the commodity boom has been China, so whether the bull run ends will depend on whether that country’s economy stalls too. “China is an important consumer of industrial metals such as copper, and if you believe, as I do, that China is closer to the end of its rate tightening than the beginning, then there is potential for demand to increase from here,” added Ms Akbar. In addition to the demand argument, rock-bottom interest rates and quantitative easing programmes from China, the US and Europe flooded the market with easy money and gave a huge boost to real assets such as commodities. Christopher Aldous of Evercore Pan Asset said: “We took full advantage of these opportunities from April 2009 by including general and agricultural commodities in most portfolios. Our exposures are centred on two exchange-traded fund securities, the Lyxor All Commodities ETF and the ETF Securities Agriculture ETF. “Since we first bought the latter in portfolios it is up by around 60pc. And the All Commodities has done pretty well too, with a rise of 45pc. We are now starting to take profits on the Agriculture ETF in case good harvests in Russia and the US take the shine off the prices of corn and wheat, which represent about 40pc of the index.” Of all the commodities, gold continues to shine most brightly for investors and, with the economic uncertainty set to linger, demand is likely to stay strong. The price hit a record high on Friday of $ 1,479. Iain Stewart of Newton, another fund manager who is dismissive of the Goldman note, continues to warm to the precious metal because of the economic outlook. He is in a cautious mood on the outlook for markets as a whole, and is surprised that stock markets have remained resilient despite the economic and political uncertainty. He expects inflationary conditions to remain as governments have no choice but to keep stimulating economies; as a result he advocates exposure to real assets, such as commodities, energy and natural resources, in addition to shares. He holds both gold exchange-traded funds (ETFs) and gold-related shares, and will do so until interest rates rise sharply. Mr Gregson takes a similar view. He admits that making the right call on gold is “tricky” but says a perfect storm – low interest rates, a financial crisis, turmoil in the Middle East and a volatile dollar – has created the demand to support the price. “Interest rates rising and a stable dollar could create a headwind for gold,” he said. “But gold equities are very cheap. We have not trimmed any of our gold exposure recently.” Several metal analysts believe it is a racing certainty that the price of gold will continue to rise. Research from metals consultancy GFMS suggests that gold prices could break through the $ 1,600 barrier by the end of the year, given worries over inflation, a weak economic recovery and the growing turmoil in the Middle East. Barclays Capital continues to believe that high demand will remain strong to support the gold price. Private investors have been pouring money into ETFs tracking gold but, even if the investment demand for gold wanes, Barclays believes that jewellery demand from India will act as a cushion. Suki Cooper of Barclays said the same could not be said for silver. “Given silver’s heavy reliance on investor interest, price action is likely to remain volatile,” she added. Mr Aldous has yet to play the gold card and admits that he has missed out on some handsome gains as a result, but he has no plans to invest now. “With hindsight, gold and precious metals, particularly silver, would also have been a fantastic investment,” he said. “Both now look very overextended and we feel it is too late to jump on the inflation worries bandwagon. In fact, our investment in US listed property ETFs outperformed precious metals in 2010, proving that all that glisters is not necessarily gold.” Goldman Sachs may have called time on commodities for the moment but it would seem that many disagree – none more so than Glencore, one of the world’s leading commodities traders. It has announced plans to float on the London and Hong Kong stock exchanges in a £37bn deal – one of the biggest public offerings in history. Brewin Dolphin, the private client investment manager, said some of its clients were likely to be interested in the listing and was confident that the commodity story would not run out of steam. “It is definitely still a solid story,” said Nik Stanojevic, an analyst at the company. “I have always said that it is going to be a lumpy journey and volatile. The supply side is still constrained and many companies are cheap because the market is discounting commodity price falls.” He added: “If those falls fail to materialise then the equities will perform well.” But Ms Akbar said investors jumping in now needed to be realistic. She said: “While entry into commodities now is not as attractive as it was, say, at the end of last year, we could still see pretty decent returns from here.”
The recent sluggishness in equity markets has certainly affected industrial commodities over the past few months, if not gold, which as pointed out earlier is just 2% below its nominal highs and rising despite the 4th margin hike on the Shanghai Gold Exchange overnight – once again gold is seen at the apex of the fiat currency replacement pyramid. So what could cause a rally in industrial commodities in the near term? Sean Corrigan lists the four key catalysts, whose occurrence listed in order of probability, could rekindle the recently faltering rally.
From the most recent edition of Sean Corrigan’s Material Evidence
So, the burning question now is whether commodity prices can shake off the disquiet caused by May’s sharp liquidation and validate the soundbite suppositions of the past few days.
With so much hot money still swilling around the world, readily available at low nominal and largely negative real rates of interest, we can never say never, but so many other beneficiaries of the Bernanke Bubble are either losing momentum and/or breaking trend, that it may be that the whole shell game has been busted pro tem.
Certainly, the fundamental backdrop is beginning to look less rosy, with Japan suffering a 13% decline in exports, Taiwan’s industrial expansion slowing, Thailand’s turning negative, US macro numbers registering a series of disappointments, UK businesses still cutting back on investment and broad swathes of China’s corporate landscape experiencing a severe margin squeeze.
Our feeling is that for a significant rally to take place from here (that is, without enduring any further, intervening weakness), one of four things has to happen soon, listed here in a loose order of their assumed probability:?
If none of these US Cavalry troopers appear over the horizon in a timely enough fashion, or until there is unequivocal evidence that speculative appetite has otherwise fully returned, our worry is that the industrial commodities in particular remain at risk of another 10?15% correction and a more thoroughgoing purge of leveraged long positions before we can find some sort of meaningful base from which to re?enter a fuller exposure.
Templeton Asset Management’s Mark Mobius says he’s high on consumer and commodity stocks because they can survive another financial crisis — which he says is inevitable because the causes of the 2008 crisis haven’t been addressed. “The problem in talking about another crisis is that no one knows when it will happen,” he says. “It could happen next year, it could happen five years from now. So we have to be invested. So what we have to do … is invest in stocks that we think can survive such a crisis.” Mobius says another crisis wouldn’t be a terrible thing — in fact, it would offer opportunities for investors. He also offers his take on China’s investment prospects.
Even a fifth consecutive year of record global corn harvests will fail to meet demand for food, fuel and livestock feed, reducing world stockpiles to the lowest in two generations. Consumption will rise 3 percent in the next marketing year, a 16th consecutive annual gain that saw demand jump 66 percent, according to U.S. Department of Agriculture estimates. Inventory will drop to 47 days of use, the fewest since 1974, the data show. Waterlogged fields in the U.S., the largest exporter, will curb yields, Goldman Sachs Group Inc. says. Corn may jump 36 percent to a record $ 9 a bushel if conditions worsen, Morgan Stanley says. Corn purchases are accelerating as droughts and floods limit output gains in everything from soybeans to wheat, driving the Standard & Poor’s Agriculture Index of eight commodities 60 percent higher in 12 months. China, the world’s second-biggest consumer after the U.S., will use 47 percent more than a decade ago, adding an amount greater than the entire crop of Brazil, the third-largest producer. “There is a storm developing in agriculture,” said Jean Bourlot, global head of commodities at UBS AG in London. “If we have the slightest disruption in any part of the world, the effect on the price will be considerable.” Corn has risen 5 percent in Chicago this year, even after dropping 7.4 percent last week to close at $ 6.60 on June 17. Today, the grain settled at $ 6.605, up 0.5 cent. Prices averaged about $ 7.02 since Dec. 31, headed for the highest annual average ever. While investors should be cautious for now, “long term, I think $ 6 to $ 7 is a normal price,” Bourlot said. Costs are rising for Tyson Foods Inc. (TSN), the biggest U.S. meat processor, and ethanol maker Archer Daniels Midland Co. The S&P GSCI index of 24 commodities advanced 5.6 percent this year, and the MSCI World Index of equities was unchanged. Treasuries returned 3.2 percent, a Bank of America Merrill Lynch index shows. Global production will rise 5.6 percent to 866.2 million metric tons in 2011-2012, still too little to meet demand of 871.7 million tons, according to the USDA, which combines variable local marketing years for its estimates. China’s pork consumption doubled in the past two decades and demand for chicken quadrupled, the USDA estimates, boosting requirements for grain-based animal feed. Surging energy prices and subsidies spurred ethanol production, with the U.S. industry using seven times more corn than 10 years ago. “For the livestock industry, the ethanol industry, and the food industry, it’s going to be a food fight,” said John Cory, the chief executive officer of Rochester, Indiana-based Prairie Mills, which processes corn meal and corn flour. “Any kind of weather problems are really going to be a significant problem.” U.S. Farmers Corn fell last week as drier weather enabled U.S. farmers to complete about 99 percent of expected plantings by June 12. A total of 69 percent of crops were in good or excellent condition. Above-average prices will spur farmers to keep sowing even if it means lower yields, Goldman Sachs said in a report June 13. The USDA will release its next acreage and inventory estimates on June 30. South American producers will also grow more, said Lawrence Kane, a market adviser at Stewart-Peterson Group in Yates City, Illinois. Corn planting starts in September in Argentina and a month later in Brazil. Demand may not expand as fast as anticipated by the USDA as economic growth weakens. Indexes tracking manufacturing in the New York and Philadelphia regions contracted this month, reports last week showed. Japan entered its third recession in a decade, and the Australian economy shrank the most in 20 years in the first quarter. China raised bank-reserve requirements to a record last week to cool the fastest inflation in three years. (more)
Commodity Index
