Perspective: Morning Commentary, 02/03/2016

Wednesday, February 03, 2016

February 3 – The big report on the U.S. calendar this week is the monthly employment summary scheduled to be released on Friday. Expectations going into the report are for it to show that the non-farm payroll rose by 188,000 jobs in January, down from 292,000 the previous month as the economy stagnated. However, those expectations may now be adjusted upward following the release of this morning’s private sector ADP report that indicated that 205,000 jobs were created in January. The number beat pre-report expectations of 190,000 jobs created, although it was still down from 267,000 the previous month.

Stocks in Asia fell overnight, led by Japan’s market. The Nikkei 225 Stock Average closed 3.2% lower as confidence in Japan’s market erodes. Traders reacted to disappointing earnings, as well as to a statement made by the Treasury cancelling a March sale of 10-year Japanese government bonds amid expectations of negative rates. Additionally, a member of the Bank of Japan strongly endorsed negative interest rates and clearly supporting additional easing. Money poured out of the stock market into the yen, causing it to post strong gains on a money flow move even though the currency’s fundamentals would appear weak longer-term.

European data was also worrisome over the past 24 hours. Markit Economics reported that its composite purchasing managers’ index fell to a four-month low of 53.6 for January, down from 54.3 the previous month. Output prices also fell to a 10-month low and service company confidence fell to a three-year low. The Bank of England will release its revised statement on monetary policy tomorrow amid expectations that another rate cut is in order.

The U.S. dollar fell sharply overnight as the yen rallied. Additional weakness came as the dollar fell through areas of chart support, falling to its lowest level in four weeks and suggesting that the greenback is vulnerable to additional weakness. The weakness should and is providing modest tail winds for the broader commodity sector this morning, making them a bit more competitive on the global market. However, gains are also limited by fears that a slowing global economy will reduce demand for commodities over all. As such, we look for some back and fill activity, but remain wary of a longer-term sustained rally.

West Texas Intermediate crude oil dipped to $29.40 per barrel overnight, completing a 62% retracement of the late January bounce. Crude finds additional support from this morning’s weak dollar, along with reports that a Bloomberg survey revealed analyst expectations of a $15 or 50% rally in prices by the end of the year. Again, such a move would be expected to be seen as supportive for the broader commodity sector.

We continue to watch for signs of money shifting from stocks to commodities. Near-term, that appears to periodically be the case, but can that pattern provide sustained strength in the commodities into the spring? Fundamentally, it is difficult to argue for a sustained rally in the broader commodity sector, including the Ags. However, such shifts in money flow can and often due occur, and they tend to lead fund managers to look at the fundamentals through a totally different filter when it does occur.

Fundamentally, traders continue to watch pockets of dryness and excessive wetness in both Argentina and Brazil, but no compelling story currently exists. Supplies remain ample to meet demand, but that demand is strong enough to suggest concern if and when a significant weather story should emerge in a major-producing area of the world. That risk is somewhat higher this year as we transition from a historically strong El Nino pattern toward La Nina, although no compelling bull story yet exists to suggest that supplies are threatened at this point. Even so, the food-based commodities are starting to gain some traction just in case.

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