Perspective: Morning Commentary, 02/11/2016

Thursday, February 11, 2016


February 11 – The global rout gained momentum overnight after Federal Reserve Chair Janet Yellen sounded a note of caution on Wednesday. Yellen testified before the House Financial Services Committee Wednesday and will follow that with testimony before the Senate Banking Committee today. Her prepared statements are not expected to differ much from Wednesday, although the questions from committee members, and therefore the answers, will likely be different and provide more fodder for the markets to digest. Yellen left the door open for additional rate hikes this year, saying that we could see moderate growth. However, she definitely took a more dovish tone in her testimony, citing potential threats to the economy from uncertainty in China and instability in the equity markets.


China remains closed for the Lunar New Year holiday today, which raises additional questions about what it might do on Monday. However, the unwinding of the carry trades continued in Japan, with the Nikkei 500 down another 2.6% overnight, while the yen continued to push higher despite its poor fundamentals. The yen is down more than 7% versus the dollar just this month, with the stronger yen pushing the dollar lower. Talk emerged overnight of possible intervention by Japan’s central bank, but thus far little evidence of intervention has been seen. The stronger yen could actually support export prospects from China in the days ahead.


The tide of sentiment toward the dollar continues to turn bearish, with traders rushing to unload the greenback. Yet, one would be wise to remember that the euro still has significant fundamental problems, with the yen’s problems even more significant. There is little fundamental reason to justify the current strength in the yen other than a fear flight from the carry trade of the past couple years. That carry unwinding will eventually come to completion, with central bank intervention also a possibility. Meanwhile, Europe’s economy continues to face strong economic headwinds, with the impact of the refugee crisis yet to be fully felt by the region. As such, the dollar remains weak, with the charts suggesting more weakness ahead, but seller beware that the tide of sentiment can change without notice in the currency markets and with some fundamental justification in this case.


Even so, Fed Chair Janet Yellen’s comments do little to support weakness in the dollar, which is being pressured by strength in the yen. The dollar fell to its lowest level since October 22 overnight amid the yen’s strength and expectations that the next rate hike is a long ways down the road. A weaker dollar would have often times been supportive of crude oil over the past year, but that is not the case with the current collapse, largely because weakness in the economy is a common threat for the two markets. West Texas Intermediate slid to $26.22 per barrel this morning, which was just 3 cents above this year’s low set in January. Holding that low becomes the critical first step toward trying to restore some stability in the markets.


The dollar is trying to rebound this morning, but the commodity markets remain under pressure nonetheless. Fund managers see little reason to be long the commodity sector as long as the economy is headed into the tank in their opinion. That sentiment could quickly change without notice should crude oil show signs of a bottom. Suddenly sentiment would shift toward the stimulative benefits of cheap commodity prices to jump start the global economy, opening the door for money to flow from the stock market to the commodity markets. That is not yet the case, and may not be for some time, but we continue to watch for signs of such.


The grain and oilseed markets have tried several times this month to separate themselves from this bearish sentiment, and are trying to do so again this morning as well. This morning’s weekly export sales data did little to support the effort though, suggesting that U.S. grain still remains the high-priced option on the world market. As such, weather remains the key for the bulls long-term.


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