Good morning,
DXU9 98.620 +0.362 GCZ9 1418.5 -19.3 ESU9 2983.00 +0.75 CLU9 57.56 -1.02
As expected, the Federal Reserve cut short term interest rates by 25 basis points. What may not have been expected was the announced acceleration to the end of balance sheet normalization. The market’s apparent interpretation of Chairman Powell’s remarks at the press conference suggests this may be viewed as an adjustment to policy, and not necessarily the beginning of an easing campaign. The dollar exploded higher on the cut, equities and gold were hit hard. Fixed income markets, and the yield curve, had a wild ride during the afternoon hours. Commodities were already reeling before the Fed, with the end of the US/China trade talks, and no deal announcement, dashing China demand hopes. Grains, cotton and hogs (limit down) all were hit hard on this. Oil was higher early on the reported lower production and inventory figures, but was leaking lower ahead of the Fed and accelerated down post Fed.
Gold is down sharply today, continuing the move down that began after the Fed. Conversely the dollar is continuing to move higher. The market’s perception that the Fed is not embarking on an aggressive easing campaign sheds some of the value off the security gold provides and increases the dollar value. The strengthened dollar erodes demand for commodities, denominated in dollars, in the export market. This is one of President Trump’s big criticisms of current monetary policy, US rates are too high compared to the rest of the world, thus the dollar is too strong and hurting US companies. So, with the strong dollar, and no major progress on the trade front, commodities remain under pressure today.
As mentioned, the grain markets were already under intense selling pressure ahead of the Fed announcement. Conclusion of trade talks with no immediate deal and an improved weather outlook to aid the underdeveloped crops were the catalyst for the selling. Although it was reported yesterday that serious and constructive talks regarding China more aggressively buying US agricultural products, the market has grown skeptical of this rhetoric. So prices weren’t really supported on this. For the month of July, grain prices were down 5.8%. Funds were aggressive sellers in the grains yesterday, selling approximately 20k in corn, 10k in soybeans and 5k in wheat. Futures open interest saw corn increase by over 23k, beans over 12k and wheat by over 8k. The grain markets will continue to monitor the weather and crop development, while marking time ahead of the next WASDE report on August 12.
Cotton and hog prices have been hit hard over the past few sessions, as optimism over a trade deal getting done wanes. Cotton faces a very large crop season, and now needs to find a home for a good portion of it. The hog futures still carry a decent sized long position, and, even with the ASF dilemma impacting a large amount of China’s hog population, lack of a trade deal will have China looking elsewhere in the world to fill the void created. Coffee futures are down sharply today. The coming projection of cooler temperatures is thought to not carry any risks of frost, which had been providing a bid to coffee of late. In addition, the stronger dollar allows for more aggressive selling from foreign producers.
The oil market, which was the most interesting trade early in the week, as soft production and inventory data drove prices higher, along with the same hopes for a trade deal, failed yesterday mid-session and began leaking down. Then, as the dollar firmed, the pressure on oil prices intensified. It appears oil remains confined to a trading range of roughly $56 on the downside and $59 overhead. The market does like to encounter wild swings back and forth within this range. The next OPEC meeting is in mid-September, so this may continue through August. Of course the month of August ramps up hurricane season in the US, so potential production disruptions will remain in the background.
Today and tomorrow bring more key economic data in the US. Today has the ISM Manufacturing Index for July, (expected 52.0 vs 51.7 last) and all of its components, and tomorrow has Nonfarm payrolls and unemployment rate for July (+165k vs +224k last; 3.6% vs 3.7%). Assuming the Fed intends to remain data dependent, and since yesterday’s cut may or may not be the beginning of an easing cycle, all views of the economy will remain important.
Technical Moving Averages:
Product 50 day 100 day 200 day
SX9 904.50 904.00 923.50
CZ9 439.25 414.00 407.00
WU9 512.75 488.25 510.75
KWU9 457.50 448.00 489.75
MWU9 547.75 546.25 568.25
SMZ9 319.2 316.2 319.0
BOZ9 28.43 28.88 29.53
CLU9 56.74 59.48 58.15
GCZ9 1386.4 1349.4 1324.3
LHV9 76.410 81.325 74.675
LCV9 107.220 111.185 113.105
KCU9 103.45 100.15 107.80
CCU9 2457 2388 2344
CTZ9 65.53 69.92 72.67
SBV9 12.35 12.58 12.95
JOU9 104.25 109.25 120.80
HGU9 268.45 278.15 278.10
Have a good day,
Mike
Michael Clifford
141 W Jackson Boulevard
Ste 1065
Chicago, IL 60604
Trean Group, LLC
312-604-6404