February 18 – Global stocks were mixed overnight as traders try to see through the fog. That’s not necessarily a good thing, as the markets traditionally do not like uncertainty, and that is what they continue to face this morning. Crude oil is firmer again this morning on “hopes” that an agreement will be reached to curtail production and ease massive inventories. Never mind that “hope” is not a plan, nor would it get as much play as it has if crude oil prices were at $80. Nevertheless, the risk for speculators holding large short positions increases notably on the possibility that “hope” will bear fruit the closer to zero that prices fall. As such, bottom-pickers remain active on that possibility that “hope” will bear fruit. The dollar index is also modestly firmer, but it has traded both sides of unchanged largely inside the previous session’s trading range.
We noted when the minutes of the January Federal Reserve meeting statement was released some key words that were omitted. The Fed removed verbiage indicating that the assessment of Fed members regarding the economy were in balance, communicating to the markets that disagreement existed among committee members about the direction of the economy, raising uncertainty and adding to weakness in the equities.
That uncertainty increased late Wednesday when the minutes of the January meeting were released. The minutes clearly state that the implications of recent developments in the domestic economy were unclear. They are in a state of confusion regarding the economy at this point – something that does not give the markets a great deal of confidence. Furthermore, they observed that recent developments in the global economy amplify the downside risks faced here in the United States.
The bottom line is that the window of opportunity for monetary tightening existed one to two years ago and was missed by the Fed. It felt compelled to act in December and did so, but now finds itself by itself swimming upstream to defend its position in a world of uncertainty created largely by central bank intervention and fiscal irresponsibility. The economy will always eventually do what it must do to remove inefficiencies and the markets must eventually reflect that. Intervention alters the timing, but the job eventually gets done, sometimes with greater pain. Nonetheless, stock futures are modestly higher, as is crude oil and the dollar with the markets cautiously waiting for the next sign of direction.
West Texas Intermediate crude oil currently trades near $1 higher and is testing the top of a channel on the charts that has contained it for the past several months. More buy stops may very well be above the market should the channel top give way, which may very well prove to be the story today. For now, we’re seeing modest money flow into the broader commodity sector on the early strength in crude oil as traders wait for further comments out of the major oil-producing nation’s that might add substance to “hope” or deflate it.
Grain and oilseed prices are soft this morning as they seek direction. Fundamentally, sustaining a rally is built on “hope” of a weather threat this year in the Midwest, although the risk of such is somewhat higher than normal. Substantively, a threat doesn’t currently exist, but speculative traders holding large short positions and are nervous at these low levels, similar to what we see in the crude oil market. I was impressed by the lead March corn contract’s ability to establish itself back above support just below $3.65 Wednesday, which it must now validate in today’s action. Upside potential remains limited by generally weak near-term fundamentals and increased producer selling on rallies. The cash market isn’t overwhelming the market, but it is interesting to note how quick farmers have been to sell these rallies, suggesting something about the state of cash flow in the country this year.
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