It’s hard to think about trading in terms of terrorist attacks. It feels like a crass misapplication of the human spirit but, this is what we do and work must continue. To that end, rather than a single setup and chart, I’d like to discuss the general effects of this weekend’s events as I see them playing out in the commodity markets.
Beginning with the currency sector, I expect the Dollar to rally as a safe a haven currency. The Euro and Swiss will likely decline as these events will hurt the European Union’s economy as the nation comes to a screeching halt. The Euro will most likely test this spring’s low at $1.0473. I also expect the Australian and Canadian Dollars to decline as both of these commodity based currencies will be hurt by the decline in overall economic activity. We expect the Australian to test its September low of $.6877 and the Canadian to test its low at $.7428. There will be less travel and less leisure which will impact energy and high grade protein sources as citizens stay home safely.
Obviously, this means I think we’re headed towards lower livestock prices due to the aforementioned issues. The only support in meat, especially beef prices lies in the holdback of cattle as ranchers are finally experiencing economic conditions conducive to growing their herds, which remain at generational lows. Grain prices should continue to decline meaning cheap feed. Furthermore, declining energy prices will help fuel lower grain prices. The upside here is that we could get a brief rally early this spring as tightening supplies become the dominant factor as life returns to normal.
Which, brings us to energy prices. The petroleum sector has had nothing but bad news thrown at it and this will continue the trend. The closing of France’s borders will contribute to the current supply glut as commercial traffic is restricted and recreational traffic comes to a standstill. Considering that these markets were already rolling over, we see no reason for them not to make new lows as crude oil trades to new lows near $30 per barrel and unleaded gasoline trades tests the 2008 lows well under $1 per gallon.
Moving to the final primary sectors, equities and interest rates, things get interesting. Obviously, we expect a flight to quality Sunday night to drive up the prices and drive down the yields of U.S. Treasuries. This is expected to be the opposite of the equity move as lower global economic consumption declines due to fear. However, given where the interest rate sector stands within the macro context, the question really comes down to, “Will these actions soften the economy enough to keep the Federal Reserve Board from raising rates?” I had previously suggested that we may get a bump by the March ’16 meeting. I believe the recent actions enforce this belief. Therefore, that makes the coming flight to quality rally a selling opportunity. Obvious targets are 128, the 50% retracement level in the December 10-year Treasury Notes and near 156 in the December 30-year Bonds.
Actual targets in the stock indices could be tougher to judge as well as their real move post knee-jerk open on Sunday night. There are two competing forces at work. The energy sector’s decline and the effects of declining international travel will undoubtedly leave a lasting mark on this week’s equity trading. However, it should be noted that most of the growth in the stock market has been due to U.S. consumption and general improvements in our domestic economy. When this is combined with the typical seasonal trend from mid-November and into Christmas, we could see a genuine bottom built on a Sunday night or, early in the week washout.
In summary, we expect the Dollar to gain strength against the Euro, Canadian and Australian Dollars. We expect livestock prices to continue to fall into next year and energy prices to tank. On the plus side, we see the coming flight to quality in the U.S. Treasuries market as selling opportunity going ahead of a domestic economy that’s fairing fairly well along with a Fed intent on raising rates sooner, rather than later. Finally, the stock market is a typical crapshoot. However, a spike lower on increased volatility could easily prove to be the buying opportunity of the quarter and into next year.
God bless and remember that France is not alone. Similar atrocities occur across Africa and the Middle East on a daily basis with very little news coverage or, moral outrage. All lives matter.
