Perspective Morning Commentary, 11/20/2015

Friday, November 20, 2015

The world’s attention shifts to the former French province of Mali today, where gunmen reportedly took hostages at a Radisson Hotel. Reports suggest that U.S. and French forces have freed more than 100 hostages, but many more remain inside as of this hour. The event reminds the global markets once again that we live in uncertain times, and likely will well into the future. Over time, the markets will need to develop a new “comfort” level with uncertainty if we’re going to build strength once again.

The dollar rebounded from Thursday’s losses today amid ideas that the greenback is still fundamentally strong and the safe-haven in times of uncertainty. The dollar broke lower in profit taking following this week’s release of the minutes of the October Fed meeting as if the rate hike had already occurred. The market’s collective wisdom considers the move a done deal and is now looking beyond the first rate hike. Currency traders believe that the Fed will be slow to push rates higher beyond this first hike, but the trend is still changing at a time when Europe looks to be adding to its already-large quantitative easing program.

European Central Bank President Mario Draghi added to euro weakness and dollar strength this morning when he added to the stimulus rhetoric, stating that the ECB will “do what it must” to raise inflation and to do so quickly. As such, all eyes will now be on the ECB’s next policy meeting scheduled for December 3; nearly two weeks before the U.S. Fed has the opportunity to act. Normally I would have expected the dollar to top with the first rate hike, since it’s been anticipated for months. However, Europe’s massive stimulus program is expected to keep pressure on the euro, supporting the dollar.

Additional support from the dollar could come from inclusion of China’s yuan into the International Monetary Fund’s bundle of currencies. That is expected to limit China’s control of the currency, creating a period of volatility in the currency market as it seeks its area of value.

The U.S. commodity markets remain beholden to the dollar, trading inverse to the greenback. Grain and oilseed prices can periodically trade independent of the broader commodity complex, but they must have a compelling story to do so long-term and such does not currently exist. Crude oil slipped to a new low for the move overnight, falling to its lowest level since late August. It would appear that commodities have value here, with several attempts of fund managers to buy potential multi-year lows already behind us. Bottoms frequently occur when it looks most bearish, which gives reason to be a contrarian.

However, my concern going forward is the realization that major moves in the dollar tend to last three to four years. The current move began mid-year 2014, meaning we could be just half way through the current phase at best. That supports the greenback’s fundamentals outlined above and argues for the possibility that the broader commodity sector will remain under pressure through 2016, making a significant weather problem essentially a necessity to hope for a sustained rally in the grains sector.

U.S. markets now look toward the holiday period. Look for trade volume to decline next week as traders take extended time off for the Thanksgiving holiday. We then slip into the period of general malaise between Thanksgiving and Christmas. Next week’s economic calendar may be short, but it is filled with several important reports that could create volatility in money flow. Data releases should provide insight into housing, manufacturing and consumer confidence trends heading into the Thanksgiving break. Keep an eye on the currency and crude oil markets for an indication of market sentiment, with the ECB meeting coming up on December 3. Global weather patterns remain rather benign headed into the weekend and the holiday break at this point.

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