Perspective: Morning Commentary, 12/24/2015

Thursday, December 24, 2015


December 24 – It is the day before Christmas and all is quiet in the markets. Many traders have already squared their positions and packed the family up for the trip to grandma’s house. Trade volume is thin and market activity is quiet. The risk though in the markets is that something noteworthy occurs to move the markets, creating an amplified reaction in the thin trade volume.


From a fundamental standpoint, economic news was mixed on Wednesday. Consumer sentiment inched higher as the Christmas shopping season peaks. Some studies show that the day after Christmas rivals the day after Thanksgiving as the busiest shopping day of the year. Retailers are adding up their returns; particularly those with an online presence. However, we won’t have a handle on overall consumer buying until early next month.


Meanwhile, new home sales rose in November to an annualized rate of 490,000 units, up 4.3% from a downwardly revised 470,000 the previous month, but below market expectations of 503,000 units. The October total was revised 25,000 units lower in Wednesday’s report, although that still reflects a strong 6.3% gain from September. There were 232,000 new homes on the market in November, up from 210,000 in the same month last year. The new-home inventory represents a 5.7-month supply at the current sales pace. New home prices were up 6.3% in November to a median price of $305,000, up 0.8% year-on-year.


Crude oil prices are firm once again this morning and poised for a test of Wednesday’s two-week high of $37.95. Those holding short positions are generally at greater risk when prices are near the bottom of the range seen in recent years than they are if prices are near the high end of the range. As such, the shorts are nervous holding their positions in the thin holiday trade as they take time off from the markets, providing underlying support for prices.


It’s a time when an unexpected news story could emerge to squeeze the shorts out of their positions. We saw the same thing happen in the corn and soybean markets at the end of last week, and is now occurring in the crude oil market. It doesn’t mean that the fundamentals have changed, or even that longer-term sentiment has changed. The rally received some support from a surprising draw of 5.88 million barrels in yesterday’s inventory report and a continued decline in rig counts, but supplies also remain near their highest level of the past 80 years for this time of year.


The dollar is weaker this morning, but off its one-week lows reached overnight. It faces similar holiday dynamics as the commodities, although in the reverse direction. Longer-term, it’s difficult to build a bearish case for the dollar versus its competitor currencies from the top tier of economic countries. Europe’s economy is struggling along at less than 0.5% with a refugee crisis adding to its problems. China’s economy continues to slow, with some even saying that it may already be in a recession. In fact, virtually all of the rest of the major global economies are in some stage of a stimulus mode trying to jump-start their economies. As such, the dollar will likely continue to create headwinds for the commodity sector going forward into 2016.


Yesterday’s first purchase of Argentine wheat by Egypt since 2012 at bargain-basement prices is not good for the wheat outlook, particularly with credit issues potentially emerging with Egypt. This week’s scattered just-in-time showers are basically over for dry areas of Brazil’s northern belt, with minimal relief over the next week, leaving areas under significant stress at 20% of the belt. However, today’s models remain very supportive of a significant upturn in rain for the dry northern areas starting late next week, with totals of at least 2 to 4” expected. It’s still early enough in the growing season for these rains to be quite beneficial.


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