November 24 – Tensions are escalating in the Middle East this morning after Turkey shot down a Russian warplane that it said was over its airspace. The world held its breathe when the reports emerged and started selling off stocks when the official Russian response was released. Russia reported that it was a “very serious incident” and that there would be significant consequences. It was the first Russian jet had been shot down by a NATO member since the 1950s.
The markets fear greater escalation of the conflict in the Middle East. Obviously, the region’s oil production is at risk, which is why crude oil prices are finding modest support this morning amid a softer dollar. However, the conflict has far greater implications with Russia now in the middle of the conflict area presenting itself as a strong man where the United States had previously been the leader.
Russia will be watching for a response, or the lack thereof, from today’s NATO emergency meeting called to address the situation. Will Turkey invoke the provision necessitating support from other NATO nations? Probably not at this point, but that’s what Russia is waiting to see. Meanwhile, we are seeing a modest move toward safe-havens in the global market.
U.S. Gross Domestic Product grew at a 2.1% rate in the third quarter, up from the previous estimate of 1.5%, but matching Wall Street expectations. The Department of Commerce reports that the decrease in private inventory investment that it included in its initial third quarter estimate proved to be smaller than first believed as more data was reported. GDP growth resulted from positive contributions in personal consumption expenditures, nonresidential fixed investment, state and local government spending, residential fixed investment and exports.
The third quarter GDP growth provides additional support for a likely Fed rate hike on December 16, even though it reflects a decline from the 3.9% rise seen in the second quarter. A number of additional economic reports will be released between now and December 16, but the primary focus will now be on the monthly jobs report to be released December 4. Of course, we’ll also know by then whether the European Central Bank will expand its current asset purchasing program when it meets on December 3.
The commodities find support from crude oil this morning, which is modestly higher due to the Middle East tensions. Crude oil saw good strength early Monday following a reversal on Friday. However, it finished well off its high and today’s rally has still failed to test Monday’s high. Even so, traders will be watching the headlines coming out of the Middle East throughout the day, with thinner pre-holiday trading leaving the markets vulnerable to a bit more volatility.
Soybeans posted a bullish reversal on the charts Monday, with support coming from the crude oil market. The reversal came after the oilseed dipped to six-year lows earlier in the session. Yet, once again the strength in soybeans was supported by the soyoil market, rather than meal, which leaves me somewhat skeptical. The broader commodity indices continue to consolidate this week near multi-year lows that were set in recent days.
I continue to look for signs of a bottom when things look most bearish, but momentum remains with the bears as the path of least resistance is still to the downside. Global weather patterns remain rather benign. The dollar’s fundamentals relative to other currencies continue to support a bias to the upside for the greenback. Global economic activity remains relatively stagnant with few end users seeing a reason to step up coverage. Welcome to the holiday malaise period the next six weeks.
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