Perspective Morning Commentary, 01/14/2016

Thursday, January 14, 2016


January 14 – It was a positive day for the Chinese markets overnight, with the closely-watched Shanghai Composite Index up roughly 2% for the session. Yet, the gains are not providing a great deal of confidence to the global markets on the whole. European stocks are weaker, although we are seeing a bounce in U.S. stock futures. Even so, global economic worries continue to be a factor, leading to weakness in the equities, as well as the commodity sector.


It’s widely believed that Chinese intervention has more to do with strength in China’s market than do genuine supportive fundamental factors. There’s a sense in the markets that China is trying to prop things up amid a lack of confidence that they can do so. The tension arises from within China, where the government seems to be seeking free market reforms on the one hand, but struggling with letting go of control on the other hand. There are those within government who understand the advantages of a free market, while others continue to be staunch believers of tight control. Confidence in the Chinese markets and in its ability to transition from an export-driven economy to a consumer-based economy cannot be obtained until China settles these tensions within its own government circles. The markets must be confident in what to expect from China and it cannot be if the government hasn’t settled the issue itself. This extends beyond its stock market to building a framework for an economy and tackling China’s massive public debt issues as well.


Meanwhile, the U.S. markets have their own confidence issues. We pride ourselves on free markets, but find ourselves moving constantly toward greater controls. The impacts of Dodd-Frank have been well documented, with significant implications for the markets. But we’ve also become addicted to the idea of central-bank management of the markets. Analysts are obsessed with whether the Fed will adjust interest rates by 25 basis points when we are near emergency lows. Virtually the rest of the world is in stimulus mode, afraid that the “house of cards” will crumble if the printing presses slow. We’re increasingly afraid of the market doing its job, which is sometimes painful, but in the end results in greater strength.


The commodities continue to struggle this morning as traders monitor the crude oil market. Crude continues to hold onto modest gains this morning, but confidence is low that we will be able to hold lows set Tuesday that dipped below $30 for the first time since December 2003. Bottom-picking efforts tend to increase the closer to zero that a market trades, but it’s yet to be seen whether the $30 mark is “close enough.” Fundamentally, supply remains large and demand remains soft. Yet it is a futures market and there will be those who increasingly point to declining rig counts and increased Middle East tensions to justify bottom-picking.


The same can be said for the grain and oilseed markets. Supplies are large, particularly for wheat, but they are ample for the other major Ag commodities as well. Fundamentally, it’s difficult to be bullish the Ag commodities. The world is comfortable with just-in-time supplies as long as they are not threatened, such as with a major weather event. Bearish sentiment in the broader commodity sector makes it easier for fund managers to be bearish the grains.
Yet, prices are at or near multi-year lows where they have traditionally stimulated demand. The surprisingly low winter wheat acres revealed in Tuesday’s USDA crop report show that the market is beginning to work by discouraging production. Global weather is beginning to be a little less cooperative as we begin the transition from very strong El Nino toward La Nina. Again, there’s nothing currently bullish in the fundamentals, but these are arguments that will likely increase the incidence of bottom-picking efforts. Whether they are successful or not is another question, with crude oil likely the key indicator to watch.


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