Perspective: Morning Commentary, 11/12/2015

Thursday, November 12, 2015


The dollar was modestly higher this morning and 400 points off its lows. A December Fed rate hike is now expected by the market, which is what brought the most recent surge in greenback strength. Historically, rate hikes anticipated over such a long period of time result in buy-the-rumor/sell-the-fact trading that sends the dollar lower, but I’ve warned that may not be the case this time around, at least not beyond a brief reaction.


That’s because deteriorating conditions in Europe, despite a massive stimulus program in place, are yielding calls for speeding up the printing press with an even larger asset-purchasing program. The possibility of expanded stimulus became much more real overnight when European Central Bank president Mario Draghi signaled that the ECB is ready to do just that at its December meeting.


Europe is the largest buyer of Chinese exports, so its problems are being closely watched by China. Meanwhile, China is the world’s largest importer of raw commodities used to produce goods and services. The unions have called a national strike in Greece to protest government policies advanced by Prime Minister Tsipras – the very one who used to lead the protests. In Portugal, an alliance of groups led by the Socialist party ousted the prime minister and Spain’s high court sent a warning to secessionist groups. Meanwhile, the refugee crisis in Europe continues to threaten cross-border economic activity in the region while increasing demand for social programs.


The combination of a Fed rate hike and ECB expanded stimulus would not be positive for the commodity sector, at least not in principle. A slowing global economy reduces demand for commodities. Demand for food-based commodities is more inelastic. In other words, the poor will spend their last dollar prioritizing food. As such, current low prices should build a stronger demand base long-term, but it should also keep the major funds content to be short (sold) the complex in the near-term.


Currency traders should have lots of fodder today, with a full lineup of Fed members speaking at various events. Fed Chair Janet Yellen will speak at 9:30 a.m. ET, while five other members speak at various times throughout the day at different events. Frequently this had led to conflicting views coming from the Fed creating swings in the market, but traders will be watching for any signs that views are beginning to coalesce around the rate hike view.


The market continues to anticipate additional stimulus in China. I focused on positive data Wednesday, but the news was less encouraging overnight. Aggregate financing fell to 476.7 billion yuan ($75 billion) in October, which was a 15-month low. The total came in at less than half the anticipated 1.05 trillion yuan. The data came out after China’s stock market closed, with the Shanghai Composite Index down 0.5% on tech company weakness.


The bottom line is that money flow dynamics look weak for the commodities for the next several months. Prices are already near multi-year lows, reducing downside risk, but with limited upside potential short of a weather scare. End users see opportunity, but no reason to panic. Longer-term, keep your eyes on dryness in the Former Soviet Union and specifically on Ukraine. Fundamentally, we have plenty of wheat in the world to meet a shortfall, but money loves to chase headlines when it comes to wheat (i.e. Summer 2010). The region sees some relief this week, but we could still see a series of headlines by spring of significant lost production in the Black Sea Region.


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