Perspective: Morning Commentary, 02/09/2016

Tuesday, February 09, 2016


February 9 – Stocks pulled well off their lows before the close Monday, but that didn’t ease fears overseas overnight. Japan’s market led the way lower on global economic concerns, with the Nikkei 500 down 5.6% on the day. Money actively flowed to the relative safety of government securities, pushing yields on Japanese 10-year bonds into negative territory for the first time. The yen also pushed more than 1% higher, although it has come off its session highs.


Bond buying around the world reflects the panic currently present among investors who are worried about the global economy. Treasury yields are at a one-year low, with German short-dated security yields dropping to record levels and the Japanese 10-year yield in negative territory for the first time in history. In all, it is reported that there are $7 trillion of government bonds offering yields in negative territory this morning. That should send a message to central banks that their monetary easing, of which the markets have become so addicted, are simply seeing diminishing returns at an astonishing rate.

 
Federal Reserve Chair Janet Yellen will begin two days of testimony before Congress on Wednesday. She is sure to get a taste of the rising frustration over the inability of global central bank activism to stimulate economic activity, with questions on negative interest rates also likely. Wall Street will be parsing her words carefully on Wednesday and Thursday for indications of future Fed policy direction. Meanwhile, market action currently suggests a one in five chance that the Fed will raise rates again this year.

 
Crude oil is currently trading at its lowest level since January 26, when West Texas Intermediate posted a low of $29.25. A drop below that level would open the door for a test of the January 20 flush low of $26.19 amid new calls for $20 crude this morning. Warnings are being sounded once again of storage facilities filling to capacity leaving a glut of oil on the market. The broader commodity sector is under pressure as a result, with traders worried about soft demand amid weak economic activity.

 
The closely-watched Thomson Reuters CRB index fell through chart support to its lowest level in nearly three weeks this morning, even as the dollar plummets to fresh three-month lows. The dollar comes under pressure as the Japanese yen rallies, along with its own chart weakness. Strength in the yen is not a reflection of confidence, but rather an unwinding of the carry trade. Investors had been borrowing the yen in order to buy stocks; both in Japan and globally. However, they are actively unwinding those positions now that the equities are tumbling, providing support for the yen while adding pressure to the dollar. Traders see little reason to defend the dollar near-term amid expectations that another Fed rate hike remains a distant threat.


The grain and oilseed markets face stiff headwinds in the current environment, with little fodder to justify separating from the bearishness of the broader commodity sector at this point. Traders will look to USDA’s monthly crop report at Noon EST today for potential fodder, but the February report is known for being quiet with few significant adjustments to the balance sheets. Trade expectations for the report are generally for USDA to boost U.S. supplies modestly due to weak export demand, even as South American production estimates slip slightly lower.
Rains lingered over Argentina on Monday, providing additional relief for previously dry areas. Additional rains are expected to reach much of the belt late Thursday through Friday night, with another opportunity the middle of next week and perhaps again in the 11- to 15-day period. In essence, nearly all corn and soybean areas should have favorable growing conditions this month, with problem areas quite limited in scope.


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