November 2016 Monthly Commodity Market Overview Newsletter. Stock Index Futures

Transcription

1 November 2016 Monthly Commodity Market Overview Newsletter By the ADMIS Research Team Stock Index Futures Stock index futures rocketed to new historical highs due to a wave of fiscal stimulus that President-elect Trump has promised. With the exception of the election day jitters, when the indexes plummeted only to recover and trade higher almost as quickly as they fell, stock index futures are performing extremely well in spite of several weaker than anticipated economic reports. For example, October nonfarm payrolls increased 161,000, which compared to the estimate of expectations of a gain of 173,000 and private payrolls advanced 142,000, when up 170,000 were anticipated. Also supportive is the corporate earnings outlook. Economists are predicting third quarter earnings growth will be 1.6% for S&P 500 companies, which compares to expectations of a 1.6% decline that was predicted a little over a month ago. The anticipated infrastructure spending in the U.S. is credible, as many industrial commodities advanced in tandem with stock index futures. For example, copper soared 11% last week and iron ore prices hit a two year high. Ramped up infrastructure spending in the U.S. will eventually have a substantial positive impact on corporate profitability and will sustain the bull market in stock index futures. 1 P a g e

2 S&P 500 Futures - Weekly Energy Crude oil prices recently gave back all of the gains that took place between mid-september to mid- October. This rally had had been motivated by increased diplomatic efforts from major oil producers, fueling expectations that the Organization of the Petroleum Exporting Countries will come to a production cutting agreement at its November 30 meeting. However, crude oil prices declined in recent weeks as skepticism grew that a production cut could actually be reached. In addition, there was pressure on futures after an industry group reported a larger than expected increase in U.S. crude supplies. The American Petroleum Institute recently said oil stockpiles rose 3.7 million barrels. Oil prices bounced off a three-month low, bolstered by speculation that members of OPEC are working out the details of a proposed reduction in crude output. OPEC members have proposed trimming collective output to between 32.5 million and 33 million barrels a day. The cartel pumped a record million barrels a day in October. 2 P a g e

3 Crude Oil Futures - Weekly In spite of skepticism that OPEC will come to a meaningful production agreement, our view remains that because of ongoing economic stimulus in many parts or the world, demand for crude oil will be stronger than generally anticipated this year and in 2017, which will drive prices up. After natural gas futures peaked in the middle of October, making an eight month high, prices fell before finding support at the 255 level. Recently, prices firmed due to forecasts for below normal temperatures across the East, which could signal more winter heating demand. While the natural gas market has built up high levels of storage this year, even slightly cooler temperatures could help work through excess inventories, as production has declined. Expect natural gas futures to advance from current levels and into the winter months, as a growing global economy stokes demand. Precious Metals After registering spectacular gains in the first quarter of this year, gold and silver futures fell as traders adjusted for the possibility that the Federal Open Market Committee may be signaling a more hawkish approach to monetary policy. Traders liquidated the yellow metal in recent weeks, as better economic data made a December rate increase more likely and political uncertainty diminished after U.S. presidential elections. 3 P a g e

4 Many analysts believe there is little reason to be long flight to quality vehicles since the financial markets weathered the political uncertainties of the November 8 elections. While it is true that there is little flight to quality influence now, analysts are paying far too little attention to the potential massive inflation aspects of a planned infrastructure surge. Remember, while a flight to quality move often lasts for a short while, often for a few days, the inflation influence, once it gets started lasts day after day, week after week and month after month. While bearish traders are focusing on a stronger U.S. dollar and a likely Fed rate hike in December, they are forgetting that Trump s infrastructure plan will push up commodity inflation levels and his immigration plan will also push up wage inflation. Gold and silver futures appear to be making a bottom. Gold Futures - Weekly U.S. Dollar The U.S. dollar fell hard in the evening hours of Election Day only to quickly reverse and close higher. And within a few days the greenback advanced to its highest level since February. More recently the greenback advanced to multi-year highs. Most if not all of the post-election gains can be attributed to the belief that President-elect Trump will ramp up infrastructure spending. Many of the economic reports have been supportive to the U.S. dollar, as well. For example, the third quarter U.S. gross domestic product increased 2.9%, which compares to expectations of a 2.6% advance. In addition, third quarter nonfarm productivity advanced 3.1%, when a gain of 2.1% was anticipated, which is the largest increase in two years. Also, the U.S. dollar is being underpinned by increasing prospects of a fed funds rate increase at the Fed s December meeting. Several Federal Reserve officials said the case for a rate increase has strengthened and a majority of officials indicated they still anticipate an increase 4 P a g e

5 in interest rates before the end of the year, leaving the December meeting as its final scheduled opportunity to move this year. The U.S. dollar should be well supported in this political and economic environment. Euro Currency With the exception of the very short lived November 8 rally, the trend has been lower for the euro currency. Many economic reports from the euro zone have been on the weak side. For example, German factory orders unexpectedly declined in September. Factory orders fell.6% from the previous month when they increased by a revised.9%. The median estimate was for an increase of.2%. The euro currency fell in spite of a report that showed a manufacturing and services PMI index rose to 53.3 in October from 52.6 in September. In addition, there was only a limited recovery on news that German unemployment declined more than analysts expected, pushing the jobless rate to a new record low of 6%. This was the lowest level since the country s reunification. Interest rate differentials are turning against the euro currency as the Federal Reserve is on track for a fed funds rate hike in December, while the European Central Bank remains in an accommodation mode. It will be difficult for the euro to mount a sustained advance. Grains In general, soybean and grain futures traded higher into the USDA November crop report, but then traded lower. The report was thought to be negative because the USDA increased the U.S corn and soybean yield and crop size. Post U.S. elections the U.S. dollar has moved higher. On November 9, the USDA estimated the U.S soybean crop at 4,361 million bushels, versus 4,269 estimated in October against the average trade guess of 4,314. This was bearish for prices, especially considering that traditional funds are net long soybean, soymeal and soy oil futures and options. The USDA also increased its estimate of the U.S. 2016/17 soybean carryout to near 480 million bushels versus 395 estimated in October. The USDA also estimated world 2016/17 soybean end stocks at a record 81.5 million tonnes. Also, on November 9, the USDA estimated the U.S corn crop at 15,226 million bushels versus the average trade guess of 15,041. In addition, the USDA now estimates the U.S. 2016/17 corn carryout near 2,403 million bushels versus 2,320 estimated in October and 1,738 last year. The higher carryout continues to offer resistance to prices. Some are still hoping that after this 5 P a g e

6 year s harvest, corn prices could edge higher to make sure U.S. farmers sell grain into the record usage pipeline. South American weather, especially in Brazil, is off to a mostly favorable start. On November 9, the USDA continued to estimate U.S. and world wheat end stocks at higher levels than last year and are adequate for demand. The U.S. 2016/17 wheat carryout is near 1,143 million bushels versus 976 last year. World 2016/17 wheat end stocks are estimated to be near million tonnes versus last year. U.S. farmers are finishing planting the U.S winter wheat crop with moisture conditions drier than normal. Some analysts believe given the lower prices they may decide to plant fewer acres in Livestock Cattle futures over the past two months have been equal opportunity trades for buyers and sellers. For instance, from September 21 and 22 to October 13 and14, December futures fell from a $ high to $86.10 and then rallied from the lows of October throughout November back to the highs of September. Strong packer profits estimated to be upwards off $170/head in November have beef packers wanting to keep slaughter levels high. Looking forward, using the October USDA Cattle on Feed report estimating placements down 2% and the November 18th COF Report estimating placements down close to 5%, suggests as long as packer profits are strong, it appears the lows made in October should hold at least through the first quarter of Similar to live cattle, feeder cattle moved down and up from the last week of September, bottoming in mid-october and throughout November recovering $13.00/cwt. Cash feeder cattle demand has been strong in November and in two weeks gained $12.00/cwt to $15.00/cwt. Exceptionally cheap feed in the Midwest with cash corn under $3.00/bushel and plentiful supplies of feed quality soft and hard winter wheats have seen demand for feeder cattle from the Midwest grain/cattle producers that have had empty lots for two to three years. 6 P a g e

7 December 16 Live Cattle Futures - Daily Lean hog futures during November traded in a sloppy up and down movement. Bottoming in mid- October, they quickly moved up $6.00/cwt, but unlike cattle that continued to move up in November, lean hogs have been in a sideways range. Very big weekly slaughter rates have pushed cash hogs down $25.00/cwt in Midwest the week ending 11/19/17. However, pork packers, like the cattle packing plants, have had impressive profits throughout November, upwards of $50/head, and are the primary reason the price of lean hogs have not dropped more in price. Packers want plants working at maximum speed and they pay just enough to make sure hogs are at the plant. World-wide hog numbers in 2017 are expected to increase in China and Brazil over 2.0% and with increases in the U.S. expected to be near 1.7%, packers will need to see similar profits they are currently having, or at least long periods of time of working in the black to keep cash hogs, or lean hogs from falling. December 16 Lean Hog Futures - Daily 7 P a g e

8 All charts above provided by QST Support and Resistance Stock Index December 16 S&P 500 Support Resistance December 16 NASDAQ Support Resistance Energy January 17 Crude Oil Support Resistance January 17 Natural Gas Support Resistance Precious Metals December 16 Gold Support Resistance December 16 Silver Support Resistance Industrial Metals December 16 Copper Support Resistance Currencies December 16 US Dollar Index Support Resistance P a g e

9 December 16 Euro Currency Support Resistance Grains March 17 Corn Support 3.25 Resistance 3.60 January 17 Soybeans Support 9.80 Resistance March 17 Chicago Wheat Support 4.00 Resistance 4.45 Livestock December 16 Cattle Support Resistance January 17 Feeder Cattle Support Resistance February 17 Hogs Support Resistance If you would like more information about the markets featured in this monthly newsletter, please send us an to Thank you. Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. The risk of loss in trading futures and options can be substantial. The views and opinions expressed in this letter are those of the authors and do not reflect the views of ADM Investor Services, Inc. or its staff. Research analysts do not currently maintain positions in the commodities specified within this report. The information provided is designed to assist in your analysis and evaluation of the futures and options markets. However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to ADMIS. Copyright ADM Investor Services, Inc. 9 P a g e