Perspective: Morning Commentary, 12/30/2015

Wednesday, December 30, 2015


December 30 – Traders still remaining active in the market are thinking more about their New Year’s Eve parties than the economy as we end the year. The markets will be open on Thursday, but closed on Friday for the New Year’s Day holiday. However, I want to take this opportunity to bid farewell to 2015 and to wish all a Happy and Prosperous New Year, as I will be traveling to my own holiday activities on Thursday and as such will not be bringing you these comments again until Wednesday of next week.


Stock futures are soft this morning following an impressive day on Tuesday. Yet, we are finishing the year very near where we started the year. That’s probably appropriate for a year when the Federal Reserve couldn’t decide if we were growing our way out of this economic mess or sinking back into it. In the end, the Fed covered its eyes and did what it should have done in the first quarter – pushing its key rate off ground-zero by 25 basis points. Its hope is that the economy will show enough strength to allow it to add about four more 25-basis point moves over the coming year, but that will largely be the debate characterizing trade in 2016.


The dollar index closed out 2014 at 90.269, riding a rally that first started gaining momentum in July. It peaked at 100.390 on March 13 of this year, followed by a 12-year high of 100.510 December 2nd. Yet, it spent much of the past nine months trading a range of 93 to 100. Its current bias is to the upside, based on the assumption that the Fed truly will attempt to bump interest rates a few more times in 2016 at a time when most of the greenback’s competitors are still running the printing presses. The dollar’s vulnerability would be if domestic data fails to support additional rate hikes, while Europe and/or others fail to sustain stimulus.


Crude oil is down more than 2% this morning, giving up much of Tuesday’s gains and down nearly 31% for the year. West Texas Intermediate spent much of December trading sideways in the mid-$30 range, but with a negative bias. It continues to be a leading indicator for the broader commodity sector, maintaining modest headwinds.
It’s difficult to be overly bearish the commodities trading near multi-year lows, but neither can one feel comfortable about saying the bottom is in place. The global economy continues to see significant headwinds; with my greatest concerns in China and Europe. Values are certainly in the area where one can anticipate periodic attempts by bottom-pickers to buy the market, but it’s difficult to build a case for a sustained rally at this point.


Looking to the Ags, the grain complex found support from a potential weather story as prices traded at or near multi-year lows. However, rains continue to increase in previously dry areas of Brazil, with nearly all dry areas expected to see extensive rains over the next 10 days. In fact, the models now suggest that the pattern may continue on into the 11- to 15-day period, taking crops a long ways toward finishing the season under favorable conditions. Wheat traders are watching winterkill potential in the days ahead for the western quarter of Russia’s crop next week, but the risk is marginal at best and recent models have shown a warmer bias. Much of India’s wheat belt remains dry thanks to El Nino, but that’s likely more of a story for February/March.


We hear chatter this morning out of the Asian markets that China may be preparing to block imports of U.S. grain sorghum and DDGS in a trade war involving cheap Chinese steel entering our country. My observation is that China will not take any action that threatens inflation pressures on food-based commodities or those necessary for the production of food; both of which are in play here. As such, taking such action would indicate that domestic supplies are adequate and that blocking imports would fit well with their intention to encourage utilization of those domestic supplies. Have a Happy and Prosperous New Year!


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