Perspective: Morning Commentary, 12/07/2015

Monday, December 07, 2015

December 7 – President Obama addressed the nation for the first time in five years from the Oval Office Sunday night. He confirmed what the FBI told us last week; that the San Bernardino attack was an act of terror. In doing so, he raised the significance of the issue, but did not provide either us or the markets with any comforting solutions.
OPEC members failed to agree on a crude oil production ceiling Friday. Iran insisted that no cuts in production be implemented until it had restored output curtailed by western sanctions in recent years. As such, members ended their meeting with no agreement to curtail production, leaving the pipeline flowing strong and sending crude oil prices lower.

OPEC said that it would keep production near 31.5 million barrels per day, but we could actually see production increase in the weeks and months ahead, with no official production caps in place, although they seldom followed them anyway. Saudi Arabia is believed to have another 2 million barrels per day of additional capacity, while Iran could probably produce another 700,000 barrels per day. Prices tumbled on the news, with follow-through selling seen this morning as well, pushing prices to their lowest level in three months. The late August low of $37.75 per barrel is now within sight, casting a bearish shadow over the broader commodity sector as well.

Meanwhile, the dollar is stronger again this morning, following-through on Friday’s bounce after the greenback utterly collapsed Thursday when the European Central Bank failed to expand its quantitative easing program. The dollar has traded more than 1,300 points off its Thursday close this morning, but still has not yet climbed above the midway point of Thursday’s vast trading range at this hour.

As such, the debate continues as to whether the dollar has in fact posted its near-term high and will eventually add to Thursday’s losses. Much of that will hinge on next week’s Federal Reserve monetary policy statement, as well as comments made by Fed Chair Janet Yellen in the press conference to follow. This rate hike may very well be the most anticipated on record and is likely priced into the market. The Fed does not want to create a market collapse as its counter-parts at the ECB did last Thursday, giving it little choice but to give us our first rate hike since 2006, even though the best window for doing so likely passed earlier this year.

This week’s economic calendar is relatively quiet compared to last week, when the markets were hit with a plethora of data releases. Things pick up a bit late in the week when we see weekly jobs data, retail sales and consumer sentiment reports.

Keep your eye on global elections over the coming year, with possible implications for the commodity sector. Massive free-market reforms are anticipated in Argentina following its November 22 election, although fulfilling those promises will be challenging. The opposition party won a majority in Venezuela’s parliament over the weekend, raising hopes that we could finally see reforms in that country. Across the pond in France, President Hollande was struck a blow when the right-leaning National Front party won the first round of the country’s regional elections Sunday. Of course, U.S. elections are 11 months away as well.

The energy sector is an anchor to those commodity indices weighted heavier in that direction this morning. That could continue to provide headwinds for the Ags. However, the grains will also continue to monitor movement in the dollar. A more substantial break in the dollar could open the door for a larger bounce in the grains, but that’s still a bit of an unknown ahead of next week’s Fed meeting. The speculative hedge funds remain heavily short wheat, opening the door for short-covering in that market.

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