Commodity Market Insights
The economic calendar this week is loaded up and should offer more guidance into the strength of the economic recovery in the U.S. and abroad. Mixed in with the onslaught of economic data, we will continue to receive corporate earnings. Approximately half of the companies in the S&P 500 have reported earnings as of last week and there will be many more to report as we roll into the month of May. The Federal Reserve will hold a two-day meeting with their rate decision and the closely analyzed policy statement to be released on Wednesday, while the European Central Bank will announce their rate decision on Thursday morning. The FOMC is not expected to make any significant changes in their statement however sentiment is growing that the ECB may announce plans for further rate cuts and/or monetary easing. Further action could ignite continued investment into riskier assets. Last week’s economic data provided more evidence that the growth of the economic recovery may be slowing down. Chicago, Richmond, and Kansas City Fed districts reported below consensus estimates that manufacturing was slowing, much like the New York and Philly Fed surveys the week before. On Monday, the Dallas Fed will announce the results of their survey, then on Wednesday the more comprehensive PMI and ISM Manufacturing Indexes will be reported. Other high profile releases will come from Personal Income and Spending, International Trade Balance and Weekly Jobless Claims. Of all the critically important data that will be reported this week, one stands out as potentially more market moving than the rest. The employment situation for April will be announced on Friday. Nonfarm Payrolls for March were a paltry 88,000, falling well short of forecasts for an increase of 193,000. Consensus estimates for Friday’s report are for a rise of 153,000 jobs and the Unemployment rate to remain unchanged at 7.6%. Stay tuned…
Last week I posted a survey that showed a long list of commodity markets that had implied volatility (IV) readings in the 99th percentile of their respective three-month ranges. The readings have scaled back a bit over the past week with only two commodities (Copper and Bean Oil) remaining at the high water mark. Many of the others have drifted a bit, but still remain near the 90th percentile. One market that caught my eye this past week was corn. IV on corn has been steadily rising since mid-February. IV was at 18.6% on 2/15/13, the lowest reading I could find for Corn options in my data history. The reading peaked at 29.4% on 03/28/13. This was the date of the highly anticipated Supply and Demand report as well as the Planting Intentions reports that resulted in a two-session 13.5% drop in price. Once the news was known, IV fell off. As of Friday’s close, however, corn option IV is now back up to 26.2%. I see a few underlying situations that may be leading to the steady increase in IV. First, cold and wet weather forecasts last week seem to be turning more accommodative for farmers looking to plant the new (potentially record) crop and the uncertainty that comes along with weather forecasts may be contributing to the lofty premiums being felt in options prices. Secondly, Friday’s commitment of trader’s data shows that Managed funds now hold a net long position of 12,239 contracts. This is down 77% from last week’s report as many reversed to go short the market as the 200-day moving average has now begun to slope down and futures have been unable to get back on the positive side of the 20-day moving average since the USDA was released. In my opinion, Corn futures may continue to see further declines as the planting and early growing season progress. If all goes well for the crops, we might see Corn trading below $5.00 / bushel.
Euro Currency futures may have a tough week ahead of them. For a long while now, the ECB has left their benchmark lending rate at 0.75%, but that may change on Thursday. The Central Bank holds its policy meeting this week and according to a Bloomberg survey, 60% of economists believe that the Bank will announce a cut to 0.50%. In my opinion, if this cut happens it could send the Euro tumbling. The benefits of owning Euros versus Dollars would become less attractive to yield seekers as the perceived gap between the U.S. benchmark (at 0.0%) would shrink. Futures have been vacillating around the 1.300 level for months and technically speaking the price looks like it could break either way over the very short term. I believe that the longer term trend is down, but the events of the week will dictate whether we see futures trade up to the 132-134.00 level once more or an immediate break below 127.50 will occur. Traders will have plenty of other incidents to focus on prior to the Bank announcement. German CPI, Spain GDP and Euro-Zone Unemployment data will be released early in the week as well as a vote on Tuesday in Greece on another round of austerity measures that is needed for the next wave of the needed EU bailout funds. Germany showed weakness in last week’s PMI data and Spain’s GDP is expected to contract by 1.3%. Spain’s government recently raised its forecast on the public deficit and reported that its unemployment rate is now at 27.2%. The fundamentals in Europe are bearish to say the least. We’ll see if this week’s news exacerbates the situation.
Gold gave up $20.00 gains twice after the close on Thursday in what may have marked the final push of the corrective rebound that began on 04/15/13. Overnight gains late Thursday evening were erased by early Friday morning. A second $20 rally that spawned from weaker than expected GDP data started to give way after just a few hours. The selling that ensued happened impulsively and on heavy volume in what felt like a miniaturized version of the shellacking the futures took on 04/12 & 04/15. As I penned in last week’s Wire, “Looking at the shorter term picture, the move lower as measured from the 04/09/13 high of $1590.1 to Tuesday’s low of $1321.5 seems to be a bit oversold on the daily continuous chart even though futures have already retraced as much as 38.2% of the drop. This tells me that the potential correction that may be trying to unfold could zigzag for several days or weeks and possibly extend closer to the 50% retracement level at $1455.8. Once this break in the action has completed, look for another forceful move that could take out the $1300.0 level and work its way down toward $1150.” The rebound extended slightly higher than mentioned as Friday’s early gains stopped just short of the 61.8% fib retracement of $1487.4. Ideally, futures will roll over again at some point during Monday or Tuesday’s trading near $1465.0-$1469.0 and then could succumb to further selling pressure for a test of the $1400.0 level again. I would consider price action above the $1500.0 level as a sign that a more prolonged correction is trying to unfold. For examples or assistance in creating bearish strategies in these markets, feel free to contact a Kingsview Financial team member to review trades that may fit your risk tolerance.