Perspective: Morning Commentary, 02/19/2016

Friday, February 19, 2016

February 19 – Unwinding of the “carry” trades appeared to be in vogue again overnight, although not with the sense of panic seen earlier this month. Stocks were down more than 1% in Japan with the yen rallying once again. That pressured the dollar, although the greenback regained some strength late in the overnight session. This week’s rebound in stocks lost momentum on Thursday, with traders again focusing on global economic concerns.

This morning’s consumer price index came in higher than expected for January. The CPI was unchanged for January month-over-month, beating expectations of a 0.1% decline. Moreover, the core CPI that excludes food and energy rose 0.3%, beating expectations of a 0.1% rise and up from 0.1% the previous month. In fact, the rise in the core CPI beat the high end of Wall Street guesses. More significantly, the core CPI surged to 2.2% year-on-year, besting the 2% target watched by the Federal Reserve.

As such, this morning’s CPI data would appear to open the door a crack again for a possible March rate hike by the Fed, just as the markets were discounting the possibility of seeing another rate hike this year. The dollar gained upward momentum on the consumer price index data release, while the euro pulled back. The strength pushed the dollar to its highest level since February 8, while creating fresh headwinds for crude oil and the broader commodity sector.

The euro has another cloud hanging over it in the approaching referendum on continued European Union membership for Great Britain. Intense talks proceeded late into the night between Great Britain and the European Union, trying to reach a deal that would secure a positive vote for the British to remain in the EU. The upcoming referendum could have major implications for the ability of the European Union to hold together. The E.U. can ill-afford to see Great Britain exit, but neither can it give too many concessions that would then be demand by other members as well, undermining the strength of the union. The referendum may come as early as June.

Crude oil turned lower from its challenge of the top of a descending channel on the charts Thursday after an energy inventory report showed stocks rising to historic highs; the highest since 1930 for this time of year. Prices for West Texas Intermediate are again probing below $30 per barrel as an abundance of global supplies is pitted against soft demand due to a sluggish global economy. The market is losing confidence that major-producing countries will reach an agreement to freeze production – let alone possibly cut it.

As such, the major commodity indices are being shorted again this morning, souring hopes that they might be able to confirm longer-term lows. Grain and oilseed prices continue their attempts to separate from the bearishness of the broader commodity sector, but as of yet they have been unable to do so. Corn should get a modest boost today from strong export sales of 41.4 million old-crop and 9.7 million bushels of new-crop.

U.S. corn is currently priced competitively on the world market and exporters are taking advantage of it. Yet, prices will quickly become uncompetitive if they rise too far, particularly if combined with a stronger dollar. Otherwise, the only real story that the grains have to hang onto to justify a sustained rally would be increased weather risk as we transition from a strong El Nino to a La Nina this year. The sheer size of large short positions in the complex provide the power needed to push prices higher, but they need to have a justifiable reason to do so, and that simply isn’t there at this time.

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