Perspective: Morning Commentary, 12/08/2015

Tuesday, December 08, 2015


December 8 – Crude oil is the talk of the markets this morning as it trades below $37 per barrel. Fears that the supply will continue to grow at a faster pace than demand maintain pressure on the energy sector, with momentum growing following Friday’s OPEC meeting that failed to agree to production limits. West Texas Intermediate crude oil is now at its lowest level since February 2009 and showing few signs of finding a bottom at this point.


Weakness in the crude oil market also weighs on the emerging markets; many of which depend on revenue from the energy sector. Furthermore, demand continues to fall short of supply for many of the commodities, including the grain and meat sectors, but also lessor talked about commodities like iron ore and nickel. In fact, iron ore prices hit a new record low.


The dollar is weaker this morning, but that is due to concerns about the economy, both here and overseas. A struggling economy does not incite speculative fund manager or end users to build ownership of the commodities. That could very well happen over the next 12 to 18 months, but it is not the environment in which we currently find ourselves.


Chinese imports fell for the 13th straight month, according to data released overnight. In fact, China’s foreign exchange reserves declined more than expected as well, reflecting declining trade for an economy that is dependent on exports and imports. Furthermore, China’s yuan lost more value as well, dropping to a four-year low of 6.4172 per dollar.


European area growth expanded at 0.3% in the third quarter, down from 0.4% in the previous quarter; and we think our GDP growth is slow. Private consumption and government spending provided the growth, while slow exports were an anchor pulling it down. Ironically, this anemic growth was seen as positive by some, indicating how bad things are there. Yet, Europe is far from being out of the woods and likely has even greater struggles ahead. The ongoing refugee crisis in Europe compounds already existing problems with public debt and unemployment despite an aggressive central bank asset purchasing program.


Sluggish economic activity overseas compounded by the worsening commodity slump will certainly be discussed behind closed doors when the Federal Reserve meets December 15 & 16 to discuss monetary policy. The above will no-doubt be cited by the doves in the group as reasons why the central bank should not raise rates. However, the Fed has painted itself in a corner and has little choice at this point if it wants to avoid the kind of chaos in the markets following last week’s lack of action in the opposite direction by the European Central Bank.
As such, the focus will be in the rest of the monetary policy statement released at 2 p.m. EST. Wall Street will be parsing words for indication of where we go from here. Will the Fed step aside for an extended period, or will it begin preparing the market for another rate hike in a few months? Perhaps the greater focus will be on Fed Chair Janet Yellen’s press conference 30 minutes later, where she will have the opportunity to answer questions on that very subject.


Global stocks are generally under pressure along with the commodity sector this morning. The grains are trying to consolidate ahead of tomorrow’s USDA WASDE crop report, but rallies continue to face stiff headwinds from the broader commodity sector. Crop stress is limited to 15 to 20% of Brazil’s soybean crop and 10% of its summer corn at this point. Corn and soybean traders are expected to start looking ahead to the 2016 U.S. growing season after the January crop report, but that is still a month away. As such, the trade continues to see rallies as opportunities to sell, frustrating producers and keeping end users hand-to-mouth.


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