Perspective: Morning Commentary, 11/18/2015

Wednesday, November 18, 2015


Terrorism grabbed the headlines once again overnight as France continued its offensive against the organization that struck it on Friday. Police executed a pre-dawn strike on a Paris suburb where they believed the master mind of Friday’s attack to be located. Two are dead and another seven arrested according to early reports. Elsewhere, two flights destined from the United States to France were diverted after bomb threats were reportedly made and a European airport terminal was evacuated due to a suspicious package. We live in a world on edge once again, which tends to leave the markets on edge as well.


European stocks pulled back modestly overnight, while U.S. stock futures are modestly higher. Traders are watching developments in Europe closely, but they are also being cautious ahead of today’s anticipated release of the minutes of the October Federal Reserve meeting. They’re looking for confirmation of comments made after the meeting that the rate hike decision was a “close call” at the October meeting. Confirmation of such would appear to add validity to expectations that we will see a rate hike when the Fed meets again in four weeks.


The dollar pulled back modestly from Tuesday’s fresh seven-month high in overnight trade as global investors wait for clearer direction from this afternoon’s Fed meeting minutes release. The greenback is near major chart resistance at the April high and traders want to be confident of its direction before pushing through the level.
The risk of the dollar breaking to new multi-year highs must be respected in light of the fact that the European Central Bank is looking increasingly likely to speed up the printing press so to speak when it meets next month. The spread in sovereign debt yields continues to widen, providing greater support for the dollar. The yield on a two-year treasury note rose to 76 basis points over its G7 peers overnight. Germany’s two-year note posted a record low yield this today of minus 0.38 percent.
China’s Shanghai Composite Index fell another 1% overnight as uncertainty around government involvement in its stock market increases. Investigations of officers and staff of security companies are believed to be expanding amid reports of seizures of computers and phones at Chinese mutual funds and a high-drama arrest of a noted hedge fund manager along a China highway. The official reason for the crackdown is believed to be tied to China’s anti-corruption campaign, but some also speculate that it may be tied to efforts to find a scapegoat for the market’s problems.


China’s problems add pressure to the beleaguered commodity sector. Economic problems around the rest of the world continue to squelch any hopes of a rebound in demand for commodities. Zinc fell to a six-year low overnight after Chinese President Xi Jinping warned of “considerable downward pressure” for its economy when he spoke at the Asia-Pacific Economic Cooperation chief executives summit.


The commodity sector started the day with modest gains across several of its sectors in what is mostly light bargain buying on ideas that there is value near these multi-year lows. The time to look for a bottom is when everything appears most bearish. As such, we’ll likely continue to see periodic bottom-picking, particularly by end users. Yet, the strength of the dollar, generally favorable global weather and sluggish global economy provide little incentive for end users to extend coverage at this point, with speculators still having reasons to be cautious as well. That leaves us vulnerable to ongoing leakage in commodity values. The possible exception could be in the U.S. cash grain market, where demand remains solid, but producers refuse to sell at current low values.


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