Perspective Morning Comments, 01/29/2016

Friday, January 29, 2016


January 29 – Global stocks rallied overnight after Japan’s central bank moved to negative interest rates. It joins Europe in posting negative rates to stimulate economic activity. Bonds jumped along with stocks, as the world loves stimulus. Later this morning we’ll get a look at U.S. fourth-quarter GDP growth, which Wall Street expects to come in at less than 0.9%.
Crude oil tried to ignite buying across the commodity sector Thursday, but failed to hold its momentum. As such, money reversed flow in the major commodity indices, wiping out most early-session gains. The reversal demonstrated how quickly the major funds could lose confidence in the broader commodity sector that still faces significant head winds. The global economy is still weak, with some indications that it has not yet found a bottom. The dollar’s fundamentals remain strong relative to many of its primary competitors, making it difficult for U.S. commodities to compete on the global market.
We take note of the fact that the dollar index broke below channel support Thursday that had held the greenback for much of the past eight weeks. Fundamentally, the dollar has fewer problems than the euro, yuan, yen and other competitors, but the Federal Reserve’s statement on Wednesday, removed some of the strength beneath it. That in turn took away some of the dollar’s upward momentum, leaving it vulnerable to a deeper correction. Commodity prices tried to rally on the weakness, but could not shrug off their own near-term bearish fundamentals. The dollar is rallying on the yen’s weakness this morning after Japan’s move.
As such, the bulk of the commodities continue to struggle year-to-date. Value buyers have certainly lifted many of them off their multi-year lows, but most continue to post significant losses relative to where they were at the turn of the calendar. One of the few bright spots has been the lean hog market, which enjoys strong consumer demand as the cheaper alternative to beef, followed by the precious metals, and to a lesser degree government securities. There’s considerable money available to the markets, but little consensus currently in the trade as to where it should park at this point. The Fed provided little insight on Wednesday, seemingly being as confused by the economy as are many casual observers.
China has been at the forefront of the global economic concerns, considering that it is the world’s largest importer of raw commodities. Indeed, demand for some of the basic economically sensitive commodities has declined in China, but that is not the case for the food-based commodities. Soybean imports continue to break records, although an increasing share of the oilseed shipments are now coming from South America due currency exchange rates and improved port facilities in northern Brazil.
We certainly anticipate that this insatiable appetite for protein for the production of meat will continue as long as China’s GDP continues to grow north of a 4% rate. Brazil is expected to continue expansion of its area devoted to soybeans with breakeven costs south of $8 per bushel. Even so, we’re looking for global supplies to slowly erode over the coming year if weather patterns favor trend yields in the major-producing areas of the world.
That should keep supplies adequate, although the safety net is expected to slowly decline, leaving the markets vulnerable to a much larger reaction when/if a legitimate weather threat emerges. The greater threat year may be 2017, based on the El Nino/La Nina cycle. Corn is in a similar situation, although current stocks in China remain large and Argentina is expected to significantly expand production beyond this year. All this is to say that the good times don’t last forever, but then again the bad times don’t either. However, it will likely take some time for these factors to play out, with stiff headwinds lingering in the near-term.


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