By John L. Caiazzo, president of the futures brokerage Acuvest
April 4, 2006 – Fed Chairman Ben Bernanke raised rates and left the door open for more increases with the statement that further increases may be necessary, which gave the dollar a push.
The answer to last week’s question “Will he or won’t he,” relating to whether or not Bernanke would raise interest rates and offer to hold off on any further rate increases, was an emphatic “Yes.” That was the highlight of fundamentals for the week, which dominated the market place. Now for some actual information that might help in decision making for the coming trading week.
Currencies
The June U.S. Dollar Index gained 33 points on Friday to close at 8939 on expectations the Fed will continue to raise U.S. interest rates. The June Swiss franc lost 36 points to close at 7735, the Japanese yen lost 29 points to 8585 and the euro lost 34 points to 12179 for June delivery. We continue to prefer the sidelines but like the Swiss franc anywhere above 75¢.
Interest rates
June Treasury bonds closed at 109-05, down 1/32 while the June 10-year was up 2.5 ticks to 106-12.5. The June Eurodollar closed flat at 947950. This week the government will report on manufacturing for March on Monday, April 3, with the Institute for Supply Management Index. Automakers will report March sales. The big 3 will probably announce having lost additional market share to Toyota, Honda, etc. The economy, in deference to the statements by the Bernanke, is showing signs of receding. Yes, the dreaded “R” word is a distinct possibility thanks to declines in the two major U.S. industry segments: the auto and housing industries. The weekly unemployment figures are showing around 300,000 first timers in line at the unemployment office. Friday will show whether the labor situation has improved or deteriorated with the Labor Department release of the number of non farm jobs added to the U.S. economy in March. With corporations showing huge layoffs, I cannot imagine a positive figure. Buy bond calls on any weakness or buy the bonds outright but only in well-capitalized accounts. The volatility has created additional risk in these instruments.
Stock indexes
The Dow Jones industrials closed at 11,109.32, down 41.38 while the S&P 500 lost 5.42 to close at 1,294.83 and the Nasdaq lost 1.03 to 2,339.79. The decline in crude oil prices on Friday pushed energy share prices lower but the end of the first quarter showed the best results in more than four years. I think we have had enough exuberance and I look for a sharp decline in equity prices and indices. I suggest hedging portfolio risk.
Energies
May crude oil closed down 52¢ at $66.63 per barrel after nearly touching two-month highs above $67. Concern about Iran’s nuclear ambitions and reports of the test firing of a missile capable of carrying multiple warheads long distances kept prices higher. Short covering was also a factor in the session. We continue to prefer the sidelines.
Copper
May copper closed at $2.4630 per pound, down 2.15¢ after touching a high of $2.51. Selling in London prompted an unchanged call in New York but prices steadily declined after the New York opening. We continue to favor the short side of copper.
Precious metals
April gold lost $4.90 per ounce to close at $581.80 after trading as low as $579 during the session. The gains in the dollar added pressure to precious metals as well as end of quarter book squaring. May silver closed at $11.52 per ounce, down 14¢ in line with gold and profit-taking. April platinum closed at $1,059.40 per ounce, down $31.30 while June palladium lost $13.50 per ounce to close at $336.80. The extreme price swings keep us on the sidelines but the relationship between precious metals and the U.S. dollar continues in force. Stay out for now or trade against the U.S. dollar and interest rate changes.
Grains and oilseeds
May corn closed at $2.36 per bushel, up 8-1/4¢ with July gaining 8-1/2¢ to close at $2.47 ¼. Speculator buying against a backdrop of lower than expected projected seedings took prices higher and brought in short covering. We like corn from here. May wheat closed at $3.47-3/4 per bushel, up 3-1/4¢ tied to the USDA reporting fewer acres planted in spring wheat. Technicals also helped prices. May opened through its 10-day moving average and settled there indicating some carryover buying may be in order for Monday. We prefer the sidelines in wheat. May soybeans lost 16-1/4¢ to close at $5.71-1/2, which is below its 10-day moving average of $5.78-1/2 on the USDA report of record stocks. Forecasts of beneficial U.S. Midwest rains in early April and an accelerated South American harvest in soybeans also were a negative factor for bean prices. I suggest the sidelines.
Coffee, cocoa and sugar
May coffee closed at $1.07 per pound, down 1.6¢ with July losing 1.55¢ to close at $1.0985. The market failed to hold or add to Thursday’s gains and locals and specs sold into it. Stay on the sidelines but look for a buying opportunity on any break under $1.00 for the May contract or $1.05 for the July contact. Some tightening was reported for Brazilian supplies, which may prompt short covering and new buying if prices can hold in the current range.
May cocoa closed at $1,489 per tonne, down $20 while the July contract lost $17 to close at $1,516 per tonne. Technicals remain weak and the strong dollar added selling pressure to cocoa. A lack of fresh fundamentals or hostilities in the Ivory Coast was also negative for prices. Stay out.
May sugar closed at 17.9¢ per pound, down 37 points with the July contract losing 32 points to close at 17.89¢. Late profit-taking ran into sell stops below the market but light trade buying held prices in check at the lower levels. I expect another attempt to get prices higher and with talk of increasing ethanol content in gasoline coming into the summer driving season, we could see renewed interest in sugar. Buy the dips.
Cotton
May cotton closed at 52.65¢ per pound, down 1.05¢. Trade selling came in right at the opening bell on technicals. The market failed to hold the 10-day moving average of 53¢ basis the May and prices declined to the Monday lows. We like cotton but the volatility in some of these soft markets keeps us on the sidelines. Stay out for now but any break basis the July to the 50¢ to 51¢ level should bring in buying. At that point, look to the long side.
Information provided is from sources deemed reliable but not guaranteed. Futures and Options trading involve a high degree of risk and may not be suitable for everyone. John Caiazzo is a registered commodities broker with over 40 years experience. These opinions are his own and not those of the futures commission merchants to whom he introduces his clients.
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